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CHICAGO: US Treasury yields marched higher on Tuesday as the shortest end of the curve continued to be pressured by debt ceiling- sparked default fears, while inflation expectations jumped.

The benchmark 10-year yield, which last week rose to its highest level since June at 1.567%, was last up 3.8 basis points at 1.5188%.

The yield on one-month Treasury bills, which on Monday shot up to 0.145%, the highest since October 2020, was last at 0.1090%. Yields on the shortest end of the curve have been elevated as the US Treasury eyes Oct. 18 as the date when it might run out of cash. In a CNBC interview on Tuesday, Treasury Secretary Janet Yellen said it was "utterly essential" to lift the debt ceiling to avoid a "catastrophic" default that would spark a recession and put the reserve status of the dollar at risk.

Bill Merz, chief fixed income strategist at US Bank Wealth Management, said yields on some Treasury bills were five times higher than they should be as the chance of a technical default looms in a couple of weeks.

"There's zero incentive to hold those for most of the large buyers of T-bills so it's understandable that they're trading at a significant discount," he said.

The US Senate is expected this week to take up a House-passed bill suspending the limit on Treasury borrowing through the end of 2022.

Inflation expectations jumped with the breakeven rate on five-year Treasury Inflation-Protected Securities (TIPS) rising to 2.61%, the highest level since late July. The breakeven rate on 10-year TIPS hit 2.444% the highest since early June.

Treasury yields edge higher after Europe foresees rate hikes

Longer term yields were rising modestly as the market braces for the US Federal Reserve to begin unwinding pandemic-related measures, including a reduction in its $120 billion in monthly bond purchases, according to Merz.

He added that the September employment report, due out on Friday, was unlikely to derail the Fed's trajectory.

"The report would need to be quite poor and even if it is, there's still a chance that the Fed would proceed with a tapering announcement in November," Merz said. "The odds are certainly in favor of a formal announcement coming in about a month, with actual tapering soon to follow."

Yields got a slight boost on Tuesday after data from the Institute for Supply Management showed US services industry activity nudged up in September, but growth is being restrained by a persistent shortage of inputs and the resulting high prices as the pandemic drags on.

The five-year note yield, which is more sensitive to intermediate interest rate hikes, was last up 3 basis points at 0.9764%.

A closely watched part of the yield curve that measures the gap between yields on two- and 10-year Treasury notes was last 3.56 basis points steeper at 123.49 basis points.

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