Treasury prices pare gains

US Treasuries pared price gains on Thursday after the US government sold new seven-year notes to slightly soft demand, the final sale of $258 billion in debt this week. The debt sold around 0.6 basis points higher in yield than before the auction, though yields fell more than 3 basis points before the sale. The bid was 2.49 times the debt on offer, the weakest since November.
Direct bidders, which includes large sovereign buyers including China and Japan as well as some large asset managers, took the largest share of the auction since September. "It was a little bit below market prices for where it went off and the bid cover was a bit light, but the direct bidders were stronger than average," said Lou Brien, a market strategist at DRW Trading in Chicago.
Seven-year notes were last up 2/32 in price to yield 2.842 percent, after dropping as low as 2.822 percent before the auction. The Treasury is facing higher debt needs after a major tax overhaul last year, which is expected to worsen the US deficit, and a two-year budget deal reached this month that will increase spending by $300 billion.
The US government also needs to replenish its cash balance, which was depleted as lawmakers negotiated to increase the debt ceiling. It also needs to enlarge its debt auctions to make up for declining purchases by the Federal Reserve, which had been tacked onto debt sales and not included in auction sizes. The amount of Treasury issuance this week, which also included $151 billion worth of bills, $28 billion of two-year notes, $35 billion of five-year notes, and $15 billion of two-year floating-rate notes, was the second-largest ever over a three-day period.
Benchmark 10-year note yields were last up 4/32 in price to yield 2.926 percent, after rising to a four-year high of 2.957 percent on Wednesday. Those yields rose after minutes from the Fed's last policy meeting showed more confidence in the need to keep raising interest rates.
The move, however, was also likely driven by hedging needs due to strong corporate debt issuance, said Subadra Rajappa, head of US rates strategy at Societe Generale in New York. "There might have been some hedging corporate issuance-related flows that might have pushed the long-end significantly higher and now you're seeing a little bit of a retracement of that," Rajappa said.