(Bloomberg) - The US 30-year yield climbed to its highest level so far this year Wednesday after poor demand for an auction of five-year notes, a week before the Treasury is expected to announce a heavier borrowing schedule for the February-to-April period.
The longest-maturity Treasury yield rose more than 5 basis points to nearly 4.42%, its highest level since Dec. 4. Yields across maturities were already higher on the day before the $61 billion auction at 1 p.m. New York time and propelled by stronger-than-expected gauges of economic activity in January.
The S&P Global gauges reinforced the recent trend of resilient economic data eroding confidence in the outlook for Federal Reserve interest-rate cuts starting by mid-year. Traders are pricing in fewer than 100 basis points of cuts by September, down from around 130 basis points earlier this month.
“The risk of the Fed staying ‘higher-for-longer’ has increased,” as a result of the data points, said Michael Franzese, partner in fixed-income trading at MCAP LLC. The auction result is “a possible sign of this.” Fed policy makers end a two-day meeting Jan. 31 and may alter market-implied expectations further.
The auction drew a yield of 4.055%, compared with an expected yield of about 4.035%, a sign of weak demand as investors were able to lock in a better rate of return. The result contrasted with Tuesday’s auction of two-year notes, for which demand met expectations.
The size of the sale was another possible factor, said Daniel Mulholland, senior managing director at Crews & Associates. It matched the biggest on record for a five-year note, and the Treasury Department has said it expects to increase auction sizes further for the February-to-April period, also on Jan. 31.
Wednesday’s auction “is a lot of duration and balance sheet” for dealers, he said. “We are finally getting to somewhat of a saturation point on both.”
(Adds trader comments, updates yield levels.)
By Elizabeth Stanton
