October 7, 2019 / 7:34 PM / 10 days ago

TREASURIES-Yields rise ahead of heavy supply at this week's auctions

(Recasts, updates yields, adds analyst quotes)

By Kate Duguid

NEW YORK, Oct 7 (Reuters) - U.S. Treasury yields rose on Monday as the $78 billion in note and bond supply slated for auction helped push prices lower after last week’s dramatic rise.

The two-year yield, which last week fell 22.6 basis points, rose 6.4 basis points to 1.462%. The benchmark 10-year yield was up 3.9 basis points, having fallen 15.9 basis points last week after data from the Institute for Supply Management showed a slowdown in the U.S. manufacturing and services sectors.

The week’s $38 billion three-year bond auction, $24 billion 10-year reopening and $16 billion 30-year reopening could significantly lower prices, as floods of supply often do.

In Monday’s trade, “yields have continued to edge higher, even as Wall Street loses ground, as bonds try to make some concession ahead of this week’s supply slate that could total some $278 billion in bill and coupon auctions,” wrote analysts at Action Economics.

“After last week’s rally, award rates at these levels would be the richest in years, with an all-time nadir for the 30-year. The bond market could have a hard time taking down the paper at these rates, especially amid uncertainties over the likelihood of a trade deal and the Fed’s policy stance.”

In addition to auctions this week, remarks from Federal Reserve Chair Jerome Powell, the release of the Federal Open Market Committee’s September meeting minutes and the restart of U.S.-China trade talks will help determine whether the market retraces last week’s price rally after the data fanned recession fears. September’s employment report, released Friday, capped some of last week’s fall in yields. Although the headline data showed steady job growth, underlying figures were more ominous.

Both Powell’s speech and this week’s auctions will offer insight on the state of money markets, where the Fed has been intervening by offering daily repurchase agreement - or repo - operations after evidence of stress in September.

“We’ll be watching dealer takedown because the repo issue highlighted that there are dealer balance sheet constraints. If the dealer takedown is decent, then I think that tells us that there could be more repo market stress, or the Fed may have to do more. That’s certainly something I’m watching beyond just how the auctions go,” said Priya Misra, head of global rates strategy at TD Securities.

Reporting by Kate Duguid; Editing by Nick Zieminski and Dan Grebler

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