TREASURIES-U.S. yields extend rise after soft 20-year auction; curve steepens for 2nd day

U.S. long-dated Treasury yields rose on Wednesday after a weak auction of 20-year bonds, with the yield curve steepening for a second day and investors paring back aggressive monetary tightening bets from the Federal Reserve. Prior to the curve steepening this week, the yield curve had flattened the last few sessions on expectations that the Fed will raise interest rates earlier than expected, pushing short-dated yields higher.

U.S. yields also extended gains after a softer-than-expected 20-year auction that saw the yield at 2.1%, higher than the expected rate at the bid deadline, suggesting investors demanded a higher premium for the bond.

“It looks as though not even a significant cheapening in the issue could boost demand given rising inflation concerns and the generally bearish momentum in Treasuries since the September 22 FOMC,” said Kim Rupert, managing director, fixed income at Action Economics in San Francisco. There were $54.1 billion in bids for a 2.25 bid-to-cover, lower than 2.36 last month and the 2.35 average.

Action Economics said this was the third lowest bid-to-cover on record for the 20-year bond, which the Treasury started selling again in May 2020. Overnight, the U.S. 10-year yield climbed to a five-month peak of 1.673%, while that on the 5-year note matched a seven- month high of 1.193% hit on Monday.

The rise in long-dated yields steepened the curve again, with the spread between U.S. 5-year notes and U.S 30-year bonds at nearly 97 basis points. “Central bank tightening fever in Europe cooled off overnight, removing immediate pressure for consistently higher intermediate yields,” wrote Jim Vogel, senior rates strategist, at FHN Financial, in a research note.