U.S. debt yields inch up before 7-note auction

By Emelia Sithole-Matarise

LONDON (Reuters) – U.S. Treasury yields inched up in European trading on Wednesday as traders made way for a $29 billion auction of seven-year notes which comes after a mixed reaction to two- and five-year note sales earlier this week.

A lukewarm reception to this supply could push U.S. yields higher and further flatten the yield curve but some traders said a 40 basis point backup in seven-year note yields from mid-March could benefit the auction.

Seven-year notes were last yielding 2.905 percent, half a basis point up from late New York trade.

The expectation is the 7-year should be fairly decent. I think you’ll see a little bit more interest up the curve,” a trader said.

“The front end of the curve isn’t that well supported at the moment as you’ve got (Federal Reserve official James) Bullard comments over the last couple of days so yields continue to rise at the front end of the curve. The belly of the curve still is reasonably well supported.”

Slightly more hawkish remarks from several top U.S. central bank officials have helped to propel Treasury yields to multi-week highs and above levels seen prior to the massive Japanese earthquake and tsunami on March 11.

Japan’s struggle to fix a quake-damaged nuclear plant, turmoil in Libya and the Middle East and Europe’s festering public debt problems have limited the decline in Treasuries, but traders have become less concerned about these risks in recent days as they are focused on quarter-end positioning.

Two-year Treasury yields, which are most sensitive to traders’ views on any shift in Fed policy, hovered at 0.82 percent, near their highest in six weeks. They have stabilized after rising nine straight sessions since touching a three-month low at 0.51 percent on March 15.

STEEPER CURVE

The two- to 30-year part of the U.S. yield curve steepened a little to 373 basis points after hitting its flattest level since early December on Tuesday. That flattening signaled traders anticipate short-term yields will rise faster than long-term ones as the Fed might move away its near-zero interest rate policy earlier than they had thought in a bid to curb long-term inflation.

Worries over tightening Fed policy, reduced safe-haven demand for bonds and rising food and energy prices have made it tough to predict how traders will react to the results of the latest seven-year.

“After yesterday’s five-year saw very scant demand, there have to be a lot of questions about how well today’s seven-year auction will go, given that the evidence suggests end investors are clearly not rushing in to pick up these higher yields,” said Marc Ostwald, a strategist at Monument Securities.

The seven-year note auction results will be released shortly after 1700 GMT.

The benchmark 10-year cash Treasury note yield was up slightly at 3.491 percent, having touched a three-week high of 3.51 percent in Asian trading.

It is 26 basis points below the highest level so far in 2011, and 30 basis points above the three-month low of 3.14 percent touched on March 16.

June 10-year T-note futures were unchanged at 118-49/64.

Traders said investors were reluctant to take big positions going into key non-farm payrolls report on Friday which some in the market expect to be stronger than in recent months.

The main U.S. data report on Wednesday will be the employment figures from ADP, which economists forecast to likely show a 203,000 increase in private payrolls in March.

A stronger-than-expected reading should offset recent disappointing readings on housing and consumer confidence, reinforcing the view that the Fed is planning to move away from its super-loose policy.

Focus will also be on comments from two Fed officials scheduled to speak in London later on Wednesday. Kansas City Fed President Thomas Hoenig will speak first (1730 GMT), followed by St. Louis Fed chief Bullard who will discuss U.S. monetary policy at a separate event.

(Additional reporting by Richard Leong in Hong Kong; Editing by Toby Chopra)

U.S. debt yields inch up before 7-note auction