Yields rise after seven-year auction, before Fed statement

NEW YORK: US Treasury yields rose on Tuesday despite the Treasury Department seeing improved demand for a $62 billion sale of seven-year notes, and before the Federal Reserve will on Wednesday conclude its two-day meeting.

Nerves had increased over the seven-year auction after the maturity drew weak demand at auctions in February and March.

"The seven-year auction was widely anticipated just because of the bad previous two auctions, so it was nice to see it make somewhat of a comeback," said Eric Souza, senior portfolio manager at SVB Asset Management.

The notes sold at a high yield of 1.306%, close to where they had traded before the auction. Yields increased in the leadup to the sale, which may have improved demand. Dealers took a below average share of 22.33% of the debt, indicating solid investor interest.

On Monday, there was solid demand for $60 billion sale of two-year notes and $61 billion in five-year notes.

Yields initially dipped on the auction results, before continuing to march higher. Seven-year yields gained four basis points to 1.300% after earlier reaching 1.309%, the highest since April 15.

Benchmark 10-year note yields rose five basis points to 1.618%, the highest since April 20. They have dropped from a more than one-year high of 1.776% last month.

The auction came before the Fed's meeting statement on Wednesday and US Gross Domestic Product data due on Thursday, which is expected to show strong first-quarter growth as the economy recovered from COVID-19 related shutdowns.

The Fed is expected to acknowledge economic improvement and investors will watch for indications of when it may begin to taper its bond purchases.

"My base expectation is we start seeing the Fed take some baby steps towards preparing the markets for some kind of potential announcement on tapering in the middle of the year," said Subadra Rajappa, head of US rates strategy at Societe Generale in New York.

The Fed faces a challenge in preparing the market for a reduction in bond purchases without sparking a "taper tantrum", which could send yields spiraling higher and potentially derail economic progress.

"You definitely don't want a taper tantrum," said Souza. "If they are thinking of tapering by the end of the year, you need to start having some sort of hints to the market."

Market participants will also watch to see if the US central bank raises the interest it pays on excess reserves (IOER) and overnight reverse repurchase agreements as borrowing rates in repo intermittently trade negative and short-term bill yields approach zero.

Overnight repo rates were at one basis point on Tuesday. They traded as low as minus six basis points last month.

One-month Treasury bill yields were also one basis point, after jumping as high as four basis points on Monday.

The federal funds rate has stayed relatively steady at seven basis points. Analysts expect the Fed will hike the IOER if the fed funds rate falls below five basis points.