US government bond yields rose on Monday, driven by a rally in stock prices, and at the start of a week in which the Treasury Department will issue $129 billion of new notes at auction. The Treasury Department on Monday sold $39 billion of new two-year notes, an increase in supply of $1 billion from the prior month, to strong demand. A group of buyers allowed to place orders directly with the government (including China's central bank) known as direct bidders took 19.5 percent of the supply on offer, the largest percentage since February 2017. Direct demand far outpaced the 5.5 percent recorded last month.
Bond issuance has been increasing steadily this year to pay for President Donald Trump's tax cuts and spending increases, with its quarterly refunding rising to $83 billion. Some market participants have worried that the increased supply will diminish demand.
"The sharp increase in direct bidding will temper concerns that investors are stepping away from Treasury auctions. We'll be closely watching whether the pattern continues into five- and seven-year note supply tomorrow and Wednesday," said Jon Hill, US rates strategist at BMO Capital Markets.
Top foreign holders of Treasuries, like China and Japan, have shrunk their portfolios of US government bonds this year. A recent barometer of participation in auctions suggests overseas buyers have not been showing up in force, according to Treasury Department data.
Government bond yields were higher across maturities on Monday afternoon, with the benchmark 10-year note yield last up 1.2 basis points at 3.07 percent, and the two-year yield up 1.6 basis points at 2.84 percent. That flattened the yield curve, even as two-year yields fell slightly following the auction. Earlier in the day the spread between two- and 10-year yields narrowed to an eight-week low of 21.8 basis points.
Auction statistics apart from direct bidders were more mixed, which kept yields elevated. Compared to the 12-month averages, the bid-to-cover ratio, a measure of overall demand, was slightly weaker, while indirect bidder demand hit the average almost exactly at 44.9 percent. "The market took the supply in stride," said Hill.
Yields were also bolstered by the rally in US stocks. Equities rose on optimism about the holiday shopping season, powering gains in shares of retail and technology stocks after a bruising sell-off last week.
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