Ten-year yields rise ahead of auction

The Treasury will sell $21 billion of reopened 10-year notes with secondary market yields about 50 basis points higher than in late September, when they dipped to their lowest in at least 60 years.

Ten-year Treasury yields were almost 3 basis points higher at 2.1869 percent, with T-note futures down 5/32 at 128-2/32. Two-year yields were flat at 0.296 percent.

The 10-year is probably going to underperform going into the supply but if we get up to the 2.20-2.25 percent area then we'll see buyers coming in," said a trader.

A second trader, at a European brokerage house, agreed that the benchmark notes would be under pressure ahead of the auction.

"Maybe a small concession but I wouldn't think it has any chance of dislodging the market," he said, adding that a recent steepening in the yield curve could help support demand for the sale.

The yield spread between two-year and 10-year notes now stands at roughly 188 basis points, up 32 basis points from last week's low near 151 basis points, which was the narrowest since January 2009.

An auction of $32 billion of three-year Treasury notes on Tuesday was met with roughly average demand. Along with the auctions on Tuesday and Wednesday, the Treasury will sell $13 billion of reopened 30-year bonds on Thursday.

Thirty-year bond yields were 4 basis points higher at 3.148 percent.

Support for 10-year Treasuries lies at roughly 2.3 percent, near a series of daily peaks hit in late August to early September. In addition, the 38.2 percent retracement of a July to September rally in 10-year notes lies near 2.266 percent.

The Federal Reserve will release minutes of its September meeting after the European market close. "The FOMC minutes ... will be closely watched on how close the Fed came to announcing more quantitative easing and what additional easing steps the FOMC might consider."

Copyright Reuters, 2011