May 9, 2018 / 3:17 PM / 7 months ago

TREASURIES-Supply glut pushes 10-year yield back above 3 percent

    By Kate Duguid
    NEW YORK, May 9 (Reuters) - The benchmark U.S. government
note yield rose back above 3 percent on Wednesday morning, a
level hit in April for the first time in more than four years,
ahead of the auction of $25 billion in new supply later in the
    Wednesday's auction is part of the $73 billion in new U.S.
debt the Treasury Department will sell this week to meet its
second-quarter financing needs. May's quarterly refunding
package is up from the $66 billion offered in February, with an
increase of $1 billion in the size of the 10-year issuance. More
supply tends to drive down Treasury prices, which pushes yields
    The Treasury on May 2 announced the increased supply of debt
to offset the impact of the Federal Reserve's reduction in its
bond buying. The new debt supply will also be used to fund the
$1.5 trillion the Republican government's tax cut bill will add
to the federal deficit. 
    "Given the economic fundamentals... and that Treasury is not
likely to be cutting back on auction sizes anytime in the near
future, it doesn't make sense for (yields) to continue to stay
below 3 percent," said Thomas Simons, money market economist at
Jefferies & Co. in New York.
    If yields remain buoyant, the new issues of 10-year
Treasuries could carry a coupon above 3 percent for the first
time since May 2011. That may in turn attract more buyers for
the debt on offer, after a somewhat disappointing turnout for
the three-year auction on Tuesday. 
    High turnout, however, may ultimately lower the 10-year note
yield on the secondary market. "The flip-side of 3 percent is
that it does tend to bring in buyers. It's one of the reasons we
haven't been able to break through in previous tests of this
level," said Simons. 
    The 10-year note yield was last trading at 2.993
percent, after hitting a session high of 3.014 in early morning
trade. Across maturities, yields were generally higher: the
30-year bond yield was 3.144 percent, 2 basis points
above its last close. The two-year yield added 1
basis point to reach 2.522 percent in mid-morning trade.
    Yields were up in spite of disappointing gains in U.S.
producer prices reported by the Labor Department on Wednesday. 
     The producer price index barely rose in April after a
strong gain in the first quarter, held down by a moderation in
the cost of both goods and services, which could ease fears that
inflation pressures were rapidly building up.
    May 9 Wednesday 11:00AM New York / 1500 GMT
 US T BONDS JUN8               142-29/32    -0-15/32  
 10YR TNotes JUN8              119-88/256   -0-44/25  
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             1.8475       1.8819    0.008
 Six-month bills               2.005        2.0537    0.011
 Two-year note                 99-184/256   2.5218    0.009
 Three-year note               99-220/256   2.6741    0.012
 Five-year note                99-162/256   2.8296    0.023
 Seven-year note               99-140/256   2.9473    0.025
 10-year note                  97-244/256   2.9929    0.025
 30-year bond                  97-60/256    3.1436    0.019
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        25.50        -0.50    
 U.S. 3-year dollar swap        20.00        -2.25    
 U.S. 5-year dollar swap        11.75        -0.50    
 U.S. 10-year dollar swap        3.00        -0.50    
 U.S. 30-year dollar swap      -10.25         0.00    


 (Reporting by Kate Duguid; Editing by Dan Grebler)
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