Sell-off sends Treasury bond yields soaring
Interest rates on U.S. Treasury bonds soared Wednesday, raising fresh concern about investors’ willingness to fund Uncle Sam’s borrowing wave.
On a day of global market upheaval, the 10-year Treasury note yield -- a benchmark for mortgage rates -- surged to a two-month high of 3.82% from 3.67% on Tuesday, the largest one-day rise since August.
Yields on shorter-term Treasuries also jumped.
The sell-off in bonds began early in the day and worsened after the Treasury auctioned $42 billion of new five-year notes at midday. Demand for the notes was weaker than expected: The Treasury had to pay a yield of 2.60% on the securities instead of the 2.56% that the market had expected.
The government has been on a record borrowing binge this year to finance its ballooning deficit. The market had been absorbing that debt with relative ease in recent months, but on Wednesday investors suddenly balked.
“The amount of supply is just kind of overwhelming,” said Tom Tucci, head of government bond trading at RBC Capital Markets in New York.
The Treasury had sold $44 billion in two-year notes Tuesday. It will auction $32 billion in seven-year notes Thursday.
Analysts noted that bond investors’ worries this year have been focused on European government debt, amid fears that cash-strapped Greece could default on its bonds. Those concerns flared again Wednesday after bond ratings firm Fitch Ratings lowered Portugal’s credit grade.
Some market pros, such as Bill Gross at bond fund giant Pimco in Newport Beach, have been shunning Treasury debt as well, warning about the risks inherent in the expanding deficit.
Investors also have become more concerned that the U.S.-China battle over the latter’s trade and currency policies could worsen and further drive the Chinese away from buying U.S. bonds. China’s total U.S. bond holdings have declined in recent months.
Some traders pointed to another factor in Wednesday’s Treasury sell-off: Investors were forsaking Treasuries in favor of higher-yielding corporate and municipal bonds. That shift would suggest faith in a continuing economic recovery.
California was able to boost the size of a planned offering of taxable bonds to $3.4 billion Wednesday, from $2.5 billion, thanks to strong investor demand.
Gary Pollack, head of fixed-income trading at Deutsche Bank Private Wealth Management in New York, said that despite the intensity of Wednesday’s Treasury sell-off, he expected investors to become aggressive buyers if yields rose another 0.10 to 0.15 of a point on 10-year T-notes.
