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Markets

Yields rise before seven-year auction, Fed meeting statement

  • Demand at a $60 billion sale of two-year notes and a $61 billion sale of five-year notes on Monday was relatively solid, pricing with yields just a fraction higher than where they had traded before the auctions.
  • The seven-year is in focus, however, after the maturity drew only weak demand at auctions in February and March.
27 Apr 2021

NEW YORK: US Treasury yields rose on Tuesday ahead of a Treasury Department sale of $62 billion in seven-year notes, its final offer of coupon-bearing supply this week, and as the Federal Reserve begins its two-day meeting.

Demand at a $60 billion sale of two-year notes and a $61 billion sale of five-year notes on Monday was relatively solid, pricing with yields just a fraction higher than where they had traded before the auctions.

The seven-year is in focus, however, after the maturity drew only weak demand at auctions in February and March.

Month-end demand may help boost demand for the notes, said Subadra Rajappa, head of US rates strategy at Societe Generale in New York.

"Typically when you get close to month-end and you have an auction, people buy," she said.

Japanese investors have also increased their purchases of foreign bonds since the start of their new fiscal year on April 1, which analysts say is helping demand for Treasuries.

Benchmark 10-year note yields rose two basis points to 1.592%. They have dropped from a more than one-year high of 1.776% last month.

Seven-year yields gained two basis points to 1.281%.

The Fed is expected to confirm that it will hold rates near zero for years to boost the economy when it concludes its two-day meeting on Wednesday, though investors will be watching for any indication of when it may begin to taper its bond purchases.

"My base expectation is we start seeing the Fed take some baby steps towards preparing the markets for some kind of potential announcement on tapering in the middle of the year," said Rajappa.

The Fed faces a challenge in preparing the market for a reduction in bond purchases as the economy improves without sparking a "taper tantrum", which would send yields spiraling higher and potentially derail economic progress.

Market participants will also be watching to see if the US central bank raises the interest it pays on excess reserves (IOER) and overnight reverse repurchase agreements as borrowing rates in repo intermittently trade negative and short-term bill yields approach zero.

Overnight repo rates were at one basis point on Tuesday. They traded as low as minus six basis points last month.

One-month Treasury bill yields were also one basis point, after jumping as high as four basis points on Monday.

The federal funds rate has stayed relatively steady at seven basis points. Analysts expect the Fed will hike the IOER if the fed funds rate falls below 5 basis points.

Gross Domestic Product data for the first quarter due on Thursday is the next major US economic release.