Impending $144 billion in new supply boosts yields

NEW YORK: US Treasury bond yields rose on Tuesday as a flood of $144 billion in new supply, led by the afternoon's $35 billion auction of three-year notes, weighed on prices.

"In a week with no shortage of fundamental guidance for the Treasury market, today's three-year auction will be the most updated gauge for front-end Treasury demand," said Benjamin Jeffery, trading products analyst at BMO Capital Markets, referring to the busy week of auctions, an ECB meeting and release of CPI data on Thursday.

On Tuesday, $35 billion of three-year notes will be auctioned, the largest amount on offer since 2010. New supply of Treasuries has increased sharply in 2018 as the Federal Reserve has reduced its bond buying and the Treasury has issued new debt to pay for President Donald Trump's $1.5 trillion tax cut.

With the three-year yield at 2.816 percent, its highest in more than a decade, analysts expect demand to be robust in spite on the increased supply.

"The $35 billion offering is the largest threes supply since 2010; however, at nearly 2.80 percent, the cycle-cheap yield the note provides should offset any concern around the continued growth of Treasury Department borrowing," said Jeffery.

While strong demand at Tuesday's auction may lift prices at the front end of the yield curve, downward pressure on those prices may continue as investor expectations rise for a fourth rate hike in December.

Expectations of higher inflation gained on Friday after the Labor Department reported the largest annual rise in wages since June 2009. The market will be watching the release of consumer price index data, a key measure of inflation, on Thursday, to see if it confirms the wage data.

The two-year yield, which reflects market expectations of Fed interest-rate hikes, on Tuesday hit a fresh decade peak for the third day in a row at a yield of 2.763 percent, the highest since July 2008.

Also auctioned on Tuesday will be $26 billion in 52-week bills and $45 billion of four-week bills. On Wednesday, $23 billion in 10-year notes will be on offer and on Thursday, $15 billion of 30-year notes.

Investors will also be watching the European Central Bank meeting on Thursday, as it moves away from unprecedented quantitative easing and toward quantitative tightening.

At 10:18 a.m. ET (14:19 p.m. GMT), the 10-year yield was last at 2.972 percent, up from a high on Monday of 2.950 percent. The 30-year yield was also up, last at 3.116 percent.