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By Gertrude Chavez-Dreyfuss
NEW YORK, Oct 8 (Reuters) – US Treasuries weakened on Thursday, pushing yields higher for a second consecutive session, as rising oil prices fueled inflation concerns and investors eyed a 30-year bond auction for fresh clues on appetite for long-term debt.
In late morning trading, the benchmark 10-year yield was up 2.8 basis points at 5.305% after hitting a 24-year high on Wednesday. US 30-year yields, on the other hand, were flat to slightly higher at 5.666%.
Rising bond yields mean Treasury debt prices are lower.
On the shorter end of the curve, US 2-year yields, which reflect interest rate expectations, rose 5.7 bps to 4.821%.
Tom di Galoma, managing director of global rates trading at Mischler Financial, thinks Thursday’s rise in yields appeared more orderly than the sharp moves seen earlier in the week.
“There’s some short-covering going on. The fact that there was good demand at the 10-year auction yesterday is a factor and that carried over a little bit,” di Galoma said. “I also think that the earlier turnaround in Europe, in which yields turned lower, somewhat boosted interest in Treasuries.”
Oil, however, remains a major driver of Treasury yields, stoking inflation concerns.
Brent crude futures were last up 4.7%, at $104.87 a barrel, the highest in over a week, while US crude futures gained 4.6%, to $92.30, their highest since October 2. Both contracts rose over $5 a barrel earlier in the session amid persistent worries about oil supply in the Middle East following attacks on shipping in the Gulf and the Strait of Hormuz.
“The market remains content to trade the energy shock solely from the perspective of the inflationary implications, largely ignoring any potential demand destruction that could follow,” wrote Ian Lyngen, head of US rates strategy at BMO, in a research note.
Thursday’s auction of $22 billion in 30-year bonds is also in the spotlight following the robust sale of 10-year notes on Wednesday. US 30-year yields have risen more than 30 basis points since the last auction in September.
J.P. Morgan in a research note said it expects the auction to go smoothly, given fair valuations. In addition, the bank said “continued outsized volatility in European sovereign debt markets relative to the US provides near-term support from foreign demand.”
Elsewhere in the Treasury market, the yield curve flattened on Thursday, with the spread between two-year and 10-year yields narrowing to 48.9 bps from 51.4 bps. Earlier in the session, the curve hit 54.2, its steepest level since mid-August.
Thursday’s flattening came as the markets reassessed how much additional Federal Reserve tightening may ultimately be required.
Fed Governor Christopher Waller said on Thursday additional rate hikes will likely be needed to lower inflation to the Fed’s 2% target, but added there was “flexibility” about the pace of increases. His comments pushed 2-year yields higher, which rose faster than 10-year yields.
(Reporting by Gertrude Chavez-Dreyfuss, editing by Deepa Babington)
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