US Treasury yields reached their highest levels in a month on Wednesday as signs Greece is near a resolution to its debt issues lifted a safe haven bid that has driven demand for the past month. Treasuries investors are now expected to shift focus to what they expect will be an improving economic story that could send yields still higher.
Continued wrangling over raising the US debt ceiling and increased volatility from the end of the Federal Reserve's $600 billion bond purchase program may also weigh on bonds in coming weeks. "The actors are changing scenes right now and I think the rate market has got to reflect a bit of the changing dynamic," said Chris Ahrens, interest rate strategist at UBS in Stamford, Connecticut.
A $29 billion sale of new 7-year notes also saw weak demand on Wednesday, the third soft auction in a row. Most analysts attributed weakness to optimism over Greece, rather than fundamental fears over US debt. "People will draw conclusions about that," said Ahrens. Quarter-end positioning, still low bond yields and ebbing fears over Greece most likely drove buyers into riskier assets at the expense of Treasuries, he said.
"I think this week's event was more a function of price levels and time and policy events in Europe," Ahrens said. Seven-year notes were last down 22/32 in price to yield 2.42 percent, the highest since the end of May. Benchmark 10-year note yields fell 21/32 in price to yield 3.11 percent, after earlier breaking above its 200-day moving average at 3.12 percent.
If yields continue to climb they may next test technical support at around 3.25 percent. Many analysts see economic data as likely to be the predominant driver of yields in the coming months. If this improves, Societe Generale sees benchmark 10-year notes as fairly valued with yields between 3.50 percent and 4.10 percent, Trading volumes, meanwhile, were robust on Wednesday, though traders expect activity will now decline heading into the US holiday weekend. Volume was $328.39 billion as of shortly after 2 pm. Eastern time, which is about 31 percent above the 20-day moving average for that time of $251.27 billion, according to ICAP.