Treasuries Fall Further on Weak Demand at Auction

US Treasury Auction Yields Fall Amid Concerns of Inflation

Market Summary US Treasury yields rose significantly after a weak auction of $69 billion in two-year notes, sparking concerns of inflation due to a potential oil-driven resurgence in prices. The auction, which was held on Tuesday, drew unexpectedly low demand, with two-year yields rising by as much as 10 basis points to 3.96%.

Market Reaction The weak auction results were attributed to the uncertainty surrounding the US's planned deployment of 3,000 troops to the Middle East, which has led to a rise in oil prices. This, in turn, has increased expectations of higher inflation, which has wiped out hopes of a Federal Reserve rate cut this year. As a result, prevailing yields for Treasuries with two years to maturity have climbed by about half a percentage point since the end of February.

Auction Metrics The auction metrics were also weak, with the 26 primary dealers awarded only 24.1% of the sale, the most in three years. Total bids were 2.44 times the amount being offered, the lowest ratio since May 2024. Additionally, there were indications of a large short base in the two-year sector, which could have contributed to the weak demand.

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Impact on Treasury Auctions The weak auction results have significant implications for upcoming Treasury auctions. The market is still facing $70 billion of five-year notes on Wednesday and $44 billion of seven-year notes on Thursday. The Treasury selloff appears to be a knee-jerk reaction to the weak auction results, although it is believed that higher oil prices have contributed to the weak demand.

Interest Rate Expectations As recently as the end of February, short-term interest-rate products fully priced in two quarter-point rate cuts by the US central bank by year-end. However, with the weak auction results, they no longer price in any rate cuts and have begun to price in a small chance that the Federal Reserve will raise rates.