Yields rise on inflation expectations, ahead of 30-year auction

NEW YORK : U.S. Treasury yields rose on Thursday, extending steep gains in the previous session, as investors continued to price in higher interest rates under an incoming Republican administration that is expected to increase spending seen as inflationary.Higher inflation tends to depress bond prices, lifting yields in the process. Longer-dated bonds are typically more sensitive to inflation expectations.

U.S. 30-year bond yields, which move inversely to prices, rose to their highest level since January, but came down in late morning trading. Benchmark U.S. 10-year bond yields also advanced, climbing to a 10-month peak as well.

President-elect Donald Trump has indicated he would increase spending on U.S. infrastructure, which market participants say could spur growth or expand the budget deficit. Both scenarios are seen as negative for the bond market.

“There’s a feeling that with the Republicans controlling both the White House and both houses of Congress that it’s more likely they will get fiscal stimulative policies passed which could spur growth and push inflation higher which bond markets don’t like,” said David Coard, head of fixed income sales and trading at Williams Capital Group in New York.

Investors are also looking to the $ 15 billion auction of U.S. 30-year bonds later on Thursday, a day after a poorly received 10-year note auction.

Coard thinks that given how U.S. 30-year bond prices have fallen post-U.S. election, the auction could attract buyers.

Aaron Kohli, interest rates strategist at BMO Capital Markets echoed the same sentiment.

“The overnight price action is an indication that investors are willing to accept some political uncertainty regarding the actual result of the election if the price is right,” said Kohli.

“Momentum indicators on the technical side have turned in favor of the bond and there’s potential for some dip-buying today and in the next few days after the auction,” he added.

In late morning trading, benchmark 10-year notes were last down 7/32 in price, yielding 2.088 percent, up from 2.064 percent late on Wednesday. The yields rose as high as 2.125 percent, the highest since January.

Thirty-year bonds were flat in price to yield 2.880 percent, compared with 2.881 percent on Wednesday. Earlier, yields reached 2.923 percent, the highest since January.

The yield curve between five-year notes and 30-year bonds also steepened by as much as 139 basis points, suggesting an elevated inflation outlook.