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BOND REPORT: Treasury Yields Extend Climb After Demand Vanishes For 'messy' Bond Auction

By Sunny Oh

A disappointing auction for 7-year notes accelerated the bond-market selloff

U.S. Treasury yields extended their climb on Thursday after a key auction for government paper struggled to draw appetite from bond investors amid signs that U.S.-China trade tensions may be easing.

What are Treasurys doing?

The 10-year Treasury note yield climbed 5 basis points to 1.520%, while the 2-year note rate was up 2.8 basis points to 1.532%. The 30-year bond yield rose 4.4 basis points to 1.985%. bond prices move in the opposite direction of yields.

What's driving Treasurys?

(link)A subdued showing for the 7-year note auction also added to the bearish trading for the Treasurys market. Market participants have commented at the historic lows that bond yields have carved out, making them more expensive than ever for investors.

The auction's bid-to-cover ratio, or the proportion of bids accepted to bids received for the debt available on sale, was its lowest since 2009.

See: Treasurys are 'frickin' expensive,' says billionaire quant investor (link)

The bond-market came under pressure in the morning, lifting yields, after China's Ministry of Commerce spokesperson Gao Feng (link)said both the U.S. and China were talking to one another, and that Beijing wouldn't immediately retaliate against President Donald Trump's latest round of tariff increases.

Rising hopes for an easing of trade tensions lifted stocks and weighed on demand for bonds. The S&P 500 index and the Dow Jones Industrial Average were on track for robust gains on Thursday.

Treasury Secretary Steven Mnuchin said in an interview with Bloomberg News that the U.S. was deliberating whether to issue ultralong bond with maturities beyond 30 years. Analysts say the Treasury Department may want to take advantage of the depressed interest rate environment to lock in low borrowing costs for a long period.

The prospect of ultralong maturities could erode demand for existing long-dated debt.

Read: Mnuchin says U.S. weighs ultralong bond issuance, no plans 'at this time' to intervene in dollar (link)

In economic data, the revision of the U.S.'s second-quarter gross domestic product (link)showed the economy grew at a pace of 2%. This steady growth was underpinned by stronger consumption spending.

The trade deficit narrowed to $72 billion in July (link), while the pending home sales (link)shrunk 2.5% last month.

What did market participants' say?

"The downside risks are so large on the trade front, the [stock] market is looking for any catalyst on the upside," Michael Reynolds, investment strategy officer at Glenmede, told MarketWatch.

"You've got a number of crosscurrents out there. You've got a move back towards risk, and valuations for Treasurys are certainly not at the most attractive point in the world," said Gary Pzegeo, head of fixed income at CIBC Private Wealth Management.

"The 7-year is only rarely popular but it is almost never this unpopular at an auction," wrote Jim Vogel, an interest-rate strategist at FTN Financial, who described the results of the auction as "messy."


(END) Dow Jones Newswires

August 29, 2019 15:43 ET (19:43 GMT)

Copyright (c) 2019 Dow Jones & Company, Inc.