Bond Report: 10-year Treasury yields edge up, auction of $19 bln bonds met by tepid demand



U.S. Treasury bond yields edged up Thursday ,with an auction of 30-year government paper met by lukewarm demand, but are still hovering near multiyear lows.

Yields on the $19 billion U.S. government debt auction cleared about one basis point higher than initially expected at 2.335%, signaling softer demand than anticipated.

The yield on the benchmark 10-year Treasury note TMUBMUSD10Y, +1.92%  tacked on 3.5 basis points to reach 1.710%, after climbing to 1.789% in earlier trade, marking its second lowest rate this year, according to Dow Jones Market Data.

The 2-year yield TMUBMUSD02Y, +0.49% picked up 4.6 basis points to reach 1.615%, after hitting an intraday high of 1.657%. It notched its fourth lowest yield this year, while the 30-year Treasury bond yield TMUBMUSD30Y, -0.95%  rose 4.2 basis points to 2.230%, down from an intraday high of 2.331%, to set its second lowest yield this year.

“Pricing was a little bit soft,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott, in an interview with MarketWatch, about the auction. “The 10-year seems to have found a short-term bottom in yields, there was softer demand from overseas and very conservative bids.”

Wednesday saw Treasury yields plummet across the board, setting new multiyear lows following a series of international central bank interest rate reductions that sparked demand from haven assets, including U.S. government debt.

But on Thursday, investors were more inclined to add riskier assets after the People’s Bank of China set its daily reference rate for its onshore yuan currency USDCNY, -0.2125% at its weakest level since April 21, 2008, but the currency fixing at 7.0039 per dollar was set at a slightly higher level than had been expected, helping calm some worries that Beijing would use its currency to engage in a more aggressive trade clash with the U.S.

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Tracking the recent volatility in government bond yields, The Dow Jones Industrial Average DJIA, +1.43% on Wednesday erased a 589-point intraday stumble.

“Right now the Treasury market is getting whipped around based on the yuan and European bond yields, with response to U.S. economic data being somewhat secondary,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group, in an interview.

In economic data, U.S. weekly jobless claims fell in early August to near post 2008 recession lows.

Tom di Galoma, managing director of Treasurys trading at Seaport Global Securities, said he’s expecting Treasury yields to rise after a series of sharp falls in sovereign debt markets.

“The bond market has run quite far over the last few weeks. We are waiting for pullbacks near 1.85% on 10 year yields to get back involved on the long-side,” he wrote in a Thursday research note.

Bonds yields have mostly mounted a steady decline reflecting increased appetite for sovereign debt amid growing concerns that the global economy is on the verge of a recession.

On Wednesday, policy makers in Thailand, India and New Zealand cut interest rates.

Hussein Sayed, chief market strategist at brokerage FXTM said, “policy makers seem to be getting prepared for a worsening global economic outlook,” he said the data, however, doesn’t necessarily support that view.

Indeed, the Bank of France’s July business survey indicated an acceleration in growth in the eurozone’s second-largest economy behind Germany.

Yields continue to be vulnerable to lower moves as the Federal Reserve is expected to cut rates further this year despite Federal Open Market Committee Chairman Jerome Powell on July 31 stating that a decision to reduce interest rates by a quarter of a percentage point wasn’t the start of a rate-cutting cycle.

Boockvar said he also thinks that Treasury yields have bottomed — for now.

“I think that is true for the short-term,” he said, but stressed that the next thing to watch will be any move by the European Central Bank in September to cut benchmark rates or if it starts another form of easing to spur eurozone economies.

Meanwhile, market bets on another quarter-of-a-percentage cut in rates at the end of the Fed’s next gathering on Sept. 18 are at 77%, with the chance of a 50-basis-point reduction at 24% based on federal-funds futures, according to CME Group data.

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