US bond yields rise

US Treasury yields rose on Tuesday as investors scaled back their bond holdings on higher Wall Street stock prices and pressure to make room for $78 billion in coupon-bearing supply from this week's quarterly government refunding. The US Treasury Department sold $34 billion in three-year notes, the largest auction for the debt maturity in eight years, to mediocre demand.
The Treasury will sell a record amount of 10-year debt worth $26 billion on Wednesday, and an all-time high of $18 billion in 30-year bonds on Thursday. Investors also face supply from the corporate bond market where companies raised $10.45 billion in the investment-grade sector on Monday, according to IFR, a unit of Thomson Reuters.
Federal debt issuance has risen since March to make up for a growing budget deficit due to a massive tax cut in December and a two-year government spending deal in February. "The market is digesting this new supply, and it will keep on coming," said Kevin Flanagan, senior fixed income strategist at WisdomTree Investments in New York.
He said it would not be surprising that some auctions fare poorly even as overall demand for Treasuries remains solid. So far, data suggested fund managers have been willing to buy the additional Treasury supply, while speculators and hedge funds are betting longer-dated Treasuries will lose value from the growth in issuance and a pickup in inflation.
Investors' net shorts in longer-dated Treasuries rose to their highest in eight weeks, but stayed close to their 52-week average, according to a J.P. Morgan Securities survey. Speculators built the highest amount of net shorts ever against 10-year Treasury futures last week, as hedge funds' net shorts on 10-year T-notes hovered at a record peak, data from the Commodity Futures Trading Commission released on Friday showed.
On late Tuesday trading, the benchmark 10-year yield increased nearly 4 basis points to 2.975 percent. It fell to a two-week low of 2.925 percent on Monday on safe-haven demand spurred by US-China trade frictions. Reduced appetite for US bonds on Tuesday stemmed from gains on Wall Street with the S&P 500 index approaching a record peak.
"It's the bounce in stocks and other risky assets that caused an uptick in yields," said Mike Lorizio, head of US Treasuries trading at Manulife Asset Management in Boston.