Yields spike after weak seven-year auction

NEW YORK: Treasury yields jumped on Thursday after the Treasury Department saw tepid interest for an auction of seven-year notes for the second month in a row, though yields came off their highs as quarter-end rebalancing was seen as boosting demand for bonds.

The $62 billion in seven-year notes sold at a high yield of 1.30%, two basis points higher than where the debt traded before the sale. The bid-to-cover ratio was below average at 2.23 times.

"It shows you the market is still nervous," said Gennadiy Goldberg, an interest rate strategist at TD Securities in New York. "It was a reminder to the market that supply events are now risky."

The auction was in focus after very weak demand in a sale of the notes last month sparked a dramatic selloff across all Treasury maturities.

Seven-year note yields got as high as 1.293%, before retracing to 1.217%. Benchmark 10-year note yields rose to 1.642%, before falling back to 1.616%.

Yields have surged this year on optimism that the economy will recover quickly from COVID-19 related business shutdowns.

Expectations that the Fed could be closer to paring bond purchases as the economy improves have added to bond weakness. At the same time the US central bank has committed to holding rates near zero for years to come, which could spur stronger economic growth and higher inflation.

Rising supply is an additional headwind for the market after the Federal government launched new stimulus and plans trillions in infrastructure spending.

"People are really starting to worry about deficits and infrastructure programs that may be coming down the road," said Tom di Galoma, a managing director at Seaport Global Holdings in New York.

Investors are "backing away from bidding aggressively for Treasury debt," di Galoma said. "There's too much coming down the road that could severely push rates higher."

US President Joe Biden next week will travel to Pittsburgh to unveil a multitrillion-dollar plan to rebuild America's infrastructure.

A short burst of selling on Thursday morning was also seen with a brief spike in trading volumes in long-dated Treasury futures, while the five-year, 30-year Treasury yield curve steepened relatively sharply.

Still, demand for bonds as investors rebalance portfolios for quarter-end is seen as likely to support the market in the coming days.

"We're focused on the flows associated with rotation out of equities and into bonds as people close the books on the first quarter of 2021," said Ian Lyngen, head of US rates strategy at BMO Capital Markets in New York.