Supply glut pushes 10-year yield back above 3 percent

NEW YORK: The benchmark US government note yield rose back above 3 percent on Wednesday morning, a level hit in April for the first time in more than four years, ahead of the auction of $25 billion in new supply later in the day.

Wednesday's auction is part of the $73 billion in new US debt the Treasury Department will sell this week to meet its second-quarter financing needs. May's quarterly refunding package is up from the $66 billion offered in February, with an increase of $1 billion in the size of the 10-year issuance. More supply tends to drive down Treasury prices, which pushes yields higher.

The Treasury on May 2 announced the increased supply of debt to offset the impact of the Federal Reserve's reduction in its bond buying. The new debt supply will also be used to fund the $1.5 trillion the Republican government's tax cut bill will add to the federal deficit.

"Given the economic fundamentals... and that Treasury is not likely to be cutting back on auction sizes anytime in the near future, it doesn't make sense for (yields) to continue to stay below 3 percent," said Thomas Simons, money market economist at Jefferies & Co. in New York.

If yields remain buoyant, the new issues of 10-year Treasuries could carry a coupon above 3 percent for the first time since May 2011. That may in turn attract more buyers for the debt on offer, after a somewhat disappointing turnout for the three-year auction on Tuesday.

High turnout, however, may ultimately lower the 10-year note yield on the secondary market. "The flip-side of 3 percent is that it does tend to bring in buyers. It's one of the reasons we haven't been able to break through in previous tests of this level," said Simons.

The 10-year note yield was last trading at 2.993 percent, after hitting a session high of 3.014 in early morning trade. Across maturities, yields were generally higher: the 30-year bond yield was 3.144 percent, 2 basis points above its last close. The two-year yield added 1 basis point to reach 2.522 percent in mid-morning trade.

Yields were up in spite of disappointing gains in US producer prices reported by the Labor Department on Wednesday.

The producer price index barely rose in April after a strong gain in the first quarter, held down by a moderation in the cost of both goods and services, which could ease fears that inflation pressures were rapidly building up.