Bond yields rise after weak five-year auction in sharp selloff

Yields on US Treasuries rose sharply on Tuesday in light, choppy trading after a disappointing five-year note sale by the Treasury and as recovering oil prices decreased appetite for US government debt. The yield on the US two-year note rose to 1.103 percent, its highest level since April 2010, while the yield on the five-year note climbed to 1.798 percent, its highest since June. Traders attributed the moves to year-end light volume and market choppiness.
The five-year note auction was expected to be well received given the surprisingly strong demand at the $26 billion sale of two-year notes on Monday, but traders were disappointed by weak demand for the notes. "Markets in the last week of December are thin and a lot of people have already closed their books for the year, so that's part of why we had a weak auction," said Justin Lederer, Treasury strategist at Cantor Fitzgerald in New York.
The Treasury will sell $29 billion of seven-year notes on Wednesday, for a total sale of $90 billion this week. Earlier on the day, the Conference Board's measure of consumer confidence rose to 96.5 in December, exceeding expectations, causing Treasuries to sell off modestly.
Oil prices recouped some losses as colder weather arrived in Europe and North America, raising hopes of a short-term pickup in demand for crude. The gains in oil put additional selling pressure on Treasuries as advances in crude prices suggested inflationary pressure. Expectations of higher inflation tend to push 30-year yields up since inflation erodes the interest payment on those bonds. The yield on the US 30-year bond climbed to a session high of 3.046 percent. It was last down 2 full points in price to yield 3.043 percent, up from 2.94 percent late on Monday.
"Weakness for the day is partially because oil is up and when oil stabilises, it helps stocks and Treasuries have to back up," said Lederer. Benchmark 10-year US Treasury notes were last down 24/32 in price to yield 2.308 percent, up from 2.225 late on Monday. Five-year notes were last down 12/32 in price to yield 1.793 percent, up from 1.716 percent on Monday. On Wall Street, the benchmark S&P 500 was last up 1.18 percent, led by a rally by tech stocks.