February 7, 2018 / 7:24 PM / 18 days ago

TREASURIES-Yields rise on tepid auction demand, budget deal

 (Adds 10-year auction, budget deal, quotes; updates prices)
    * Soft demand for $24 bln 10-year note auction
    * U.S. budget deal boosts growth expectations
    * Treasury to sell $16 bln 30-yr bonds on Thursday

    By Karen Brettell
    NEW YORK, Feb 7 (Reuters) - U.S. Treasury prices dropped on
Wednesday after the Treasury Department sold new 10-year notes
to soft demand and the U.S. Senate reached a budget deal,
boosting expectations of stronger economic growth.
    The U.S. government had to pay higher rates to auction $24
billion in 10-year notes, the second sale of $66 billion in
coupon-bearing supply this week.
    The high yield on the sale was around 1 basis point above
where it had traded before the auction.             
    “Overall the auction was a little weak,” said Justin
Lederer, an interest rate strategist at Cantor Fitzgerald in New
York.
    The government will sell $16 billion in 30-year bonds on
Thursday. The United States saw tepid demand for a $26 billion
sale of three-year notes on Tuesday.             
    Bonds also came under pressure after lawmakers agreed on a
two-year bipartisan budget deal worth around $300 billion that
would lift caps on defense and domestic government spending. The
White House said that the deal would increase the debt ceiling
through March 2019.                          
    Benchmark 10-year notes            were last down 17/32 in
price to yield 2.830 percent, up from 2.766 percent on Tuesday.
    The yields rose as high as 2.885 percent in overnight
trading on Monday, the highest since January 2014, after
stronger inflation data led investors to fear that the Federal
Reserve may raise rates more times than previously expected.
    Investors “still believe the economy is doing quite well,”
said Tom di Galoma, a managing director at Seaport Global
Holdings in New York. "I think the trend is weaker in
Treasuries."
    Next week’s consumer price and retail sales data will be
closely scrutinized for further indications of rising price
pressures.
    Dallas Fed President Robert Kaplan said on Wednesday that
higher wages would not necessarily lead to faster inflation.
            
    Chicago Fed President Charles Evans said that sluggish price
increases give the Fed room to hold off on interest rate
increases until at least mid-2018.             
    Another concern for bond investors is that the Treasury
faces larger funding needs due to the U.S. central bank’s
declining participation in the bond market.
    "There are reasons for us to go higher in yield with the Fed
in play and with more supply,” said Lederer.
    Large increases in issuance this year are expected after the
government raises the debt ceiling.

 (Editing by Cynthia Osterman)
  
 
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