August 1, 2018 / 7:53 PM / 19 days ago

Ten-year yield at two-month high as U.S. steps up borrowing

NEW YORK (Reuters) - The benchmark 10-year U.S. Treasury note’s yield reached its highest in 2-1/2 months on Wednesday, breaking above 3 percent after the government said it intended to boost borrowing in the bond market in the coming quarter to fund spending and debt obligations.

Even before the funding announcement, yields had risen in early morning trade in sympathy with Japanese bond-market activity. JGB yields soared to a 1-1/2 year high overnight as investors tested the Bank of Japan’s new commitment to allow debt markets to move more freely.

The release of Treasury’s quarterly refunding report furthered those gains, pushing the 10-year note yield US10YT=RR to a session high of 3.016 percent, the first time it has risen above 3 percent since June 13. Yields across maturities rose to session highs as prices fell on expectations that supply growth would outpace demand while the Fed raises U.S. interest rates.

“You are seeing supply pressure and continuing central bank developments pushing yields higher,” said John Canavan, market strategist at Stone & McCarthy Research Associates in New York.

The U.S. Treasury announced at 8:30 a.m. EST (1230 GMT) that it would introduce a new benchmark 2-month bill starting in October 2018 and increase the size of debt auctions in the coming months. The government needs to fund a rising budget deficit even as the Federal Reserve continues to reduce its massive bond portfolio.

Some analysts said the largest selloff in Japanese bond in two years had a bigger impact on Treasury yields than the expected increase in U.S. supply.

“The drivers of all of this are (Japanese government bonds.) As the JGB yield curve steepens because of the machinations of the Bank of Japan, that will translate into every large government bond market,” said Krishna Memani, chief investment officer at OppenheimerFunds in New York.

Yields remained higher late in the session, little moved by the Federal Reserve’s expected afternoon announcement that it would not raise interest rates in August.

The 30-year bond yield US30YT=RR was up as much as 6.6 basis points from late Tuesday to 3.148 percent. The two-year yield US2YT=RR was up 1.7 basis points from Tuesday to a session high of 2.686 percent. The 10-year note yield was last at 3.003 percent, slightly below its session high.

Reporting by Kate Duguid. Additional reporting by Richard Leong; Editing by Bernadette Baum and David Gregorio

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