Ten-year Treasury Yields Slip Ahead of $39 Billion Auction

Rates on U.S. government debt saw their first decline in three sessions on Tuesday morning, ahead of a $39 billion auction of 10-year Treasury notes.

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Current Market Activity:

• The yield on the 2-year Treasury fell by 3.2 basis points to 4.851%, down from 4.883% on Monday. (Yields move inversely to prices.)
• The 10-year Treasury yield decreased by 1.8 basis points to 4.450%, from 4.468% on Monday.
• The 30-year Treasury yield dropped slightly by less than 1 basis point to 4.585%, down from 4.594% on Monday.

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Market Drivers:Yields declined as traders anticipated the next significant Treasury auction at 1 p.m. Eastern time. This followed a $58 billion sale of 3-year notes on Monday, which saw weak demand from direct bidders.

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Looking ahead, the consumer-price index (CPI) for May will be released on Wednesday morning, followed by the Federal Reserve’s policy update and forecasts in the afternoon.

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Bond investors are hopeful that the CPI report will indicate a continued moderation in inflation, which may prompt the Fed to start cutting borrowing costs later this year, despite ongoing strength in the labor market.

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According to the CME FedWatch Tool, Fed-funds futures traders are pricing in a 52.6% chance that the Fed will reduce interest rates from the current range of 5.25% to 5.50% by September.

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In Europe, French government bonds continued to sell off, with yields rising another 4.1 basis points to 3.27%, marking the highest level of 2024. This is due to investor anxiety over France’s unexpected election.

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Strategist Insights:Will Compernolle, a macro strategist at FHN Financial in New York, commented, "The 10-year UST auction this afternoon is the only potential catalyst for some new market momentum today." He noted that while yields at the long end of the curve could fluctuate based on the auction results, intermediate yields are expected to remain stable.

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“Our baseline expectation is for the auction to be digested smoothly,” he wrote in a note, adding that there is more upside risk to yields on 10-year Treasuries than downside. “Investors often require some concession when an auction happens close to a big data release or a Fed decision, and there is still room for bonds to unwind some of their gains from the last couple of weeks.”

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