US Treasury yields up by 20 basis points after 2-year auction

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US Treasury yields up by 20 basis points after 2-year auction

The US Treasury yield went up by more than 20 basis points on Monday, due to poor demand for a two-year note auction triggering renewed selling that propelled key benchmarks higher by more than 20 basis points and sent the 10 year rate up by the most since the March 2020 Covid crash.

Bearish market sentiment is being driven by poor liquidity, as a result of the US inflation hitting a four-decade high and a hawkish Federal Reserve that now expects to push policy rates to at least 4.6% in 2023. Pressure on the global bond market was added by a renewed surge in UK gilt yields, with key benchmarks rising around 40 to 50 basis points.

Both nominal and inflation adjusted yields climbed to fresh multi-year peaks, accelerating a deeper rout. The 10 year rose as much as 24 basis points to 3.93% in New York, its highest level since April 2010. Treasury options flow was active and mixed in direction with yields at extended peaks. The US yield fell by six basis points to 3.86% in the Asian session on Tuesday.

Jason Pride, chief investment officer of private wealth at Glenmede Investment Management said the Fed is in a situation where they have to go harder and the market is picking up on this. At the time bidding closed, the Treasury curve came under pressure after bonds at the two-year auction were sold at a higher yield than the market rate, a sign that surging bond yields aren't enough to lure buyers. That sets a gloomy forecast for the upcoming sales of five-, and seven-year notes this week, especially as month and quarter-end liquidity tends to be thinner.

The selloff on Monday had five-year yields up by more than 20 basis points to around 4.19%, while seven-year yields went up 24 basis points to 4.11%, reaching a peak seen in 1993. A Bloomberg index of the US Treasury market's liquidity conditions has climbed steadily in recent weeks and is just shy of its peak in March 2020.

The real yield climbed 31 basis points to 1.91% over the five-year period. The rates on both tenors fell by three basis points on Tuesday.

The 30 year bond lagging the selloff led to concerns that Fed policy will push the economy into recession, with its yield up 13 basis points at 3.74%. The spread between the two year and 30 year yields widened to as much as negative 0.68 percentage points, the deepest inversion since 2000, before easing back to normal late in trading on Monday. The spread on 10 year and 2 year Treasuries was minus 43 basis points, about 10 basis closer to positive territory.