Treasury yields tick up, curve flattens

US Treasury yields ticked up on Tuesday in muted trading ahead of the release of June's Federal Reserve meeting minutes on Wednesday.
Yields at the short end of the curve moved more than at the long end, extending a multi-day trend as the market awaited the Federal Open Market Committee minutes, and Fed Chair Jerome Powell's congressional testimony on Wednesday. Both may provide insight into an expected interest rate cut this month.
The two-year Treasury bond yield was last up 3.1 basis points at 1.911%, the highest since mid-June. The benchmark 10-year yield was last up 2.7 basis points to 2.061%.
Stronger-than-expected employment growth in June tempered expectations that the Fed would cut interest rates by 50 basis points at its July meeting, but a 25 basis point cut remains fully priced in by the market.
The probability of a 25-point cut was 96.2% on Tuesday, with a 3.8% chance of a 50-point cut.
A week prior, those forecasts were 75% and 25% respectively.
The "expectation that we would get a weaker-than-expected payrolls number (has) thrown traders off their game, at least for now," said Kevin Giddis, head of fixed income capital markets at Raymond James.
"Today and the rest of this week we will give heavy weight to what the Fed says."
The spread between two- and 10-year yields, the most common measure of the yield curve, fell in early trade to 14.2 basis points, its lowest since May 31. It was last at 14.9 basis points.
Powell will deliver the Fed's semiannual monetary policy report to the House of Representatives Financial Services Committee on Wednesday, followed by testimony before the Senate Banking Committee on Thursday.
Some analysts noted that the meeting minutes would be more likely to move markets than Powell's remarks.
"We're watching the minutes that are coming out tomorrow.
That's the big thing," said Wen Lu, interest rates strategist at TD Securities.
"I don't think there's going to be anything significant that comes out of the testimony," said Lu. "It will be extremely straightforward.
On Tuesday, the Treasury Department auctioned off $38 billion of new three-year notes to solid demand. Direct bidders took 17.92% of the offering, indirect bidders took 48.5% and primary dealers took 33.58%.
The bid-to-cover ratio was 2.39, the lowest since March 2009.