Treasury prices gain

US Treasury prices gained on Monday as higher yields caused by the recent sell-off tempted some new buyers, though a new sale of two-year notes drew relatively weak demand from fund managers. Yields have soared since the election of Republican Donald Trump as US president on November 8 as investors bet he will adopt policies that spur higher growth and inflation, which may also lead the Federal Reserve to raise interest rates more times than previously expected.
"These yields are quite attractive, so you could be seeing a bit of dip buying," said Gennadiy Goldberg, an interest rate strategist at TD Securities in New York. Benchmark 10-year note yields jumped as high as 2.36 percent on Friday, before retracing to 2.34 percent on Monday. The note yields had traded at around 1.80 percent before Trump's surprise election.
Many investors, however, were reticent to buy new debt at a $26 billion auction of two-year notes on Monday, the first sale of $88 billion in coupon-bearing supply this week. Indirect bidders, including fund managers and central banks, which typically buy 40 to 50 percent of the sale, took only 35 percent of the notes. The debt sold at a high yield of 1.085 percent, the highest since December 2009.
"Guys are still too long the front-end of the market and the fundamentals have eroded," said Tom Tucci, head of Treasuries trading at CIBC in New York, noting that short-and-intermediate notes are vulnerable to further weakness as investors focus on the prospect of additional interest rate increases. Two-year note yields rose as high as 1.09 percent in secondary trading on Monday, the highest since December 30, 2015. The yields have soared from 0.81 percent before Trump's victory.
The Treasury Department will sell $34 billion in five-year notes on Tuesday and $28 billion in seven-year notes on Wednesday, in addition to $13 billion in two-year floating rate notes on Tuesday. Fed Vice Chair Stanley Fischer said on Monday that spending and other efforts to boost sluggish productivity could help reduce the Fed's burden of supporting the economy. Futures traders are pricing in a 95 percent likelihood that the US central bank will raise rates for the first time this year when it meets next month, according to the CME Group's FedWatch Tool.