Treasuries yields rise

US Treasuries yields rose on Wednesday as investors prepared for a seven-year note sale on Thursday, overcoming a safe-haven bid for government debt as Middle East tensions sent oil prices higher and weighed on stocks. Two-year Treasury notes also tested technical support at yields of around 0.74 percent for a second day, the top of a trading range that had held for around two months until early February when yields across the Treasury curve soared.
Treasury prices fell on Wednesday after a $35 billion auction of new five-year notes sold with a tail of 3.3 basis points. The notes last traded down 6/32 in price to yield of 2.18 percent. Dealers took the majority of the sale for the second auction day, buying 58 percent of the notes.
"It's a very difficult environment to be bidding on $35 billion of securities when you're trading off oil and the stock market," said Tom Tucci, head of government bond trading at RBC Capital Markets in New York. "I think the market is going to be defensive going into the seven-year auction." The Treasury will sell $29 billion in seven-year notes on Thursday. The notes last traded down 8/32 in price to yield 2.88 percent, up from 2.83 percent on Tuesday.
Prices had gained earlier on Wednesday for a second consecutive session as oil prices surged over $100 a barrel, dampening demand for stocks. Investors have also been pricing in lower expectations that the Federal Reserve will increase interest rates in the near term.
"The market was short and starting to bet on the Fed raising rates," said Richard Gilhooly, interest rate strategist at TD Securities in New York. "I think those bets are coming off the table." Unlike previous tightening periods, analysts believe that the Fed will hold off on raising rates even when growth picks up as policy makers are trying to engineer inflation in employment and wages.
"They are trying to encourage inflation, and the market hasn't quite accepted that yet," Gilhooly said. As a result, shorter-dated Treasuries may be likely to outperform as they benefit from the Fed being on hold, and the yield curve is likely to steepen, he added. Meanwhile, surging oil prices sent breakeven levels on Treasury Inflation Protected Securities higher, led by shorter-dated bonds, indicating investors are pricing in higher inflation expectations. Five-year TIPS breakevens rose on Wednesday to 220 basis points, up around 10 basis points on the day and their highest level in two and a half years.