The yield on the benchmark US government note rose back above the psychologically significant level of 3 percent on Wednesday afternoon following fair investor demand at auction for $25 billion in new 10-year notes. The possibility of a 3 percent coupon for the first time in seven years drew investors to the auction. While that proved elusive, the yield at auction was 2.995 percent, the highest level reached since January 2014.
"At the 3 percent level, bonds, in our view, are actually attractive for long-term investors," said Krishna Memani, chief investment officer at OppenheimerFunds in New York. Demand from direct bidders was notable, with the large institutions and foreign countries that buy Treasuries directly at auction rather than through banks taking home 8.3 percent of the supply, about a percentage point over the six-week average.
Wednesday's auction is part of the $73 billion in new US debt the Treasury Department will sell this week to meet its second-quarter financing needs. May's quarterly refunding package is up from the $66 billion offered in February, with an increase of $1 billion in the size of the 10-year issuance. More supply tends to drive down Treasury prices, which pushes yields higher. "Given the economic fundamentals... and that Treasury is not likely to be cutting back on auction sizes anytime in the near future, it doesn't make sense for (yields) to continue to stay below 3 percent," said Thomas Simons, money market economist at Jefferies & Co. in New York.
The Treasury on May 2 announced the increased supply of debt to offset the impact of the Federal Reserve's reduction in its bond buying. The new debt supply will also be used to fund the $1.5 trillion the Republican government's tax cut bill will add to the federal deficit. The 10-year note yield was last trading at 3.006 percent, up from Tuesday's close. Across maturities, yields were generally higher: the 30-year bond yield was 3.163 percent, adding 4 basis points since its last close ahead of Thursday's auction of $17 billion of new supply at that maturity. Yields were up in spite of disappointing gains in US producer prices reported by the Labor Department on Wednesday.