Thursday, July 10, 2014

Treasurys extend drop after weak 10-year note sale

NEW YORK (MarketWatch)—Treasury yields extended a push higher Wednesday after a weak auction of benchmark notes, putting the 3-year Treasury note yield on track to close above 1% for the first time in three years.

The shorter-term yield, which is sensitive to shifts in expectations about Federal Reserve monetary policy, has been on the rise as investors recalibrate forecasts toward earlier hikes to the central bank's key lending rates.

/quotes/zigman/4868286/delayed 3_YEAR 1.03, +0.08, +8.20% 3-year Treasury note yield

The Fed is set to release minutes of its last policy meeting at 2 p.m. Eastern, which may shed light on whether the central bank is thinking about when and how it will lift rates. The Fed is committed to a near-zero policy rate until the labor market improves further and inflation stabilizes.

The 3-year yield (3_YEAR) , which rises as prices fall was up 2.5 basis points on the day at 1.023%; the last time it closed above 1% was in April 2011.

Nonetheless, investors still view rate-hike timing as more subdued than the consensus outlook published by the Fed. Futures contracts tied to the fed funds rate project the first rate hike occurring in June 2015, according to CME FedWatch.

"The gap between the market view of rates and the Fed's summary of economic projections is smaller than it was a few weeks ago but it's still wide, suggesting the market is discounting [the Fed] significantly," said Jake Lowery, portfolio manager with Voya Investment Management.

Treasurys extended a fall after a weak auction of $21 billion in 10-year Treasury notes (10_YEAR) , where non-dealers bought a smaller portion of the debt than during recent sales. After the auction, benchmark note yield was up 2.5 basis points at 2.590%.

The 5-year note (5_YEAR)  yield was up 3 basis points at 1.727% while the 30-year bond (30_YEAR)  yield rose a basis point to 3.393%. The differential between them narrowed to the least since 2009 in what's known as a flattening yield curve.

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