Government debt yields rise ahead of supply

By Karen Brettell

NEW YORK (Reuters) – U.S. Treasuries yields rose on Monday as investors prepared for $66 billion in new supply.

The auctions will be closely watched to see if a three-week increase in yields will attract buyers.

Concerns about the need to raise the U.S. government’s debt ceiling, rising inflation and how fast the Federal Reserve will remove monetary stimulus and, in turn, raise rates, are seen as likely drivers of Treasuries near term.

The U.S. government will sell $32 billion in new three-year notes on Tuesday and $21 billion and $13 billion in 10-year and 30-year reopenings on Wednesday and Thursday.

“You have a lot of uncertainty in the market,” said Gary Pollack, managing director at Deutsche Bank Private Wealth Management in New York. “The question is whether these levels are sufficient to bring in some investment or not.”

Benchmark ten-year notes, for example, have risen almost 50 basis points from their low yields of 3.14 percent reached in mid-March. The notes fell 5/32 in price on Monday to yield 3.60 percent, where they are seen having key technical support.

Tuesday’s three-year note auction could be volatile, however, as a result of trading in the repurchase market where the notes are trading at negative yields of around 1 percent.

Investors typically sell the current series of three-year notes before an auction, and then buy back the new series of the notes, said Michael Cloherty, interest rate strategist at RBC Capital Markets in New York.

However, the negative repo rates “makes that a little bit more difficult to price, because of the financing volatility,” Cloherty said. “I’d say that means slightly greater risk around this auction.”

Three-year notes fell 1/32 in price on Monday to yield 1.33 percent, up from 1.32 percent on Friday. They traded at an almost 5 basis point premium in the when-issued market, which indicates where traders expect the new debt may price, at 1.38 percent.

ECONOMY, INFLATION FEARS WEIGH

Concerns that Treasury yields will need to rise further to reflect economic improvement and rising inflation are causing some investors to exit the market while fears about the U.S. government’s fiscal situation could also hurt the debt.

PIMCO shifted to a short position in U.S. government related debt and raised its cash holdings on concerns about the U.S. fiscal outlook.

The move “is something that makes me a little nervous… (PIMCO) have the ability to move the market,” said Deutsche’s Pollack.

Near-term Treasury yield direction, however, will likely be driven by the economy rather than the country’s fiscal situation, he said.

“If the economy slows down you could see people reversing the ‘risk on’ trade and going into the safety of Treasuries,” he said

Breakevens in Treasury Inflation-Protected Securities are also trading at their highest levels since July 2008, as some fear the Fed will lose control of inflation.

Breakevens on five-year TIPS, which gauge market inflation expectations, rose to 244 basis points on Monday.

Producer price and core price inflation data released on Thursday and Friday will be closely watched to see how fast U.S. inflation is rising.

Five-year Treasuries fell 3/32 in price to yield 2.33 percent, up from 2.31 percent and 30-year bonds fell 11/32 in price to yield 4.67 percent, up from 4.64 percent.

(Editing by Kenneth Barry)

Government debt yields rise ahead of supply