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Yields rise after weak auction, as fiscal stimulus seen near

  • The Treasury saw soft demand for $27 billion in 30-year bonds, its final sale of $126 billion in coupon-bearing supply this week.
  • Our base case view is for a $1 trillion package, but I think market expectations are gravitating towards something much larger.
Published February 12, 2021
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NEW YORK: US Treasury yields rose and inflation expectations jumped to their highest levels since 2014 on Friday after the US Treasury Department on Thursday saw weak demand for a sale of new 30-year bonds.

The Treasury saw soft demand for $27 billion in 30-year bonds, its final sale of $126 billion in coupon-bearing supply this week.

The auction "didn't go over that great, you had a one basis point tail and we saw a big drop in participation by indirect bidders, which is generally thought of as foreign investors," said Zachary Griffiths, a macro strategist at Wells Fargo in Charlotte.

An auction tail is when yields price at a higher level then before the sale, which indicates tepid interest.

The Treasury will also sell $27 billion in 20-year bonds next Wednesday and $9 billion in 30-year Treasury Inflation-Protected Securities (TIPS) on Thursday.

Inflation expectations have also ramped up as Democrats work on a new fiscal spending bill.

"Our base case view is for a $1 trillion package, but I think market expectations are gravitating towards something much larger," said Griffiths.

US President Joe Biden will meet with a bipartisan group of mayors and governors on Friday as he continues to push for approval of a $1.9 trillion coronavirus relief plan to bolster economic growth and help millions of unemployed workers.

Benchmark 10-year yields rose to 1.192%, but held below an 11-month high of 1.200% reached on Monday. Thirty-year yields were 1.988%, after rising above 2% on Monday for the first time in a year.

The closely watched yield curve between two-year and 10-year notes steepened three basis points to 108 basis points.

Breakeven inflation rates rose to 2.23%, their highest since 2014, which means that investors are now pricing in average annual inflation of 2.23% for the next 10 years..

The rates had dipped after data on Wednesday showed weaker than expected inflation in January.

Investors are also focused on Treasury bills after the Treasury Department earlier this month said it will cut bill issuance to reduce its cash balance.

Analysts expect the Federal Reserve to hike the interest it pays on excess reserves (IOER) if Treasury bill rates fall below zero. The one-month and three-month bills currently yield three to four basis points.

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