U.S. yields at multi-year highs attract buyers to 30-year auction

By Elizabeth Stanton

(Bloomberg) — Yields on U.S. government debt rose to fresh multi-year highs — stoking demand for an auction of 30-year bonds — as surging oil prices bolstered the case for a Federal Reserve interest-rate hike as soon as next week.

Treasury yields rose by five to 12 basis points across maturities, with the 30-year benchmark reaching levels last seen in 2007 and the two-year note yield exceeding 4.5% for the first time since 2024. Traders boosted expectations for a Fed rate hike next week to about 70% and fully priced in a move by October instead of December.

The selloff lured investors to a $22 billion auction of 30-year bonds, which drew historically strong demand. The new securities were awarded at 5.308%, nearly three basis points lower than their yield in pre-auction trading just before the bidding deadline, meaning that bidders at higher yield levels missed out. Investor demand was so strong that a record low 2.2% of the sale went to Wall Street dealers.

The market has “cheapened up enough to embolden dip-buyers,” said Vail Hartman, a strategist at BMO Capital Markets. “It’s a reflection of ongoing investor demand for duration despite the prevailing bond-bearish momentum.”

The auction’s 5.308% result was 2.7 basis points lower than the market level going in, the second-biggest negative gap on record in the past five years.

The record low share awarded to primary dealers was also the lowest-ever primary dealer award in a conventional Treasury auction of any tenor.

“For years investors yearned for these levels, maybe not under these conditions, but given interest for all-in yield, the auctions are in our view reflections of true demand,” said George Goncalves, head of U.S. macro strategy at MUFG.

On Thursday, the 10-year note’s yield rose 10 basis points to 4.94%. In Treasury options trading, flows included the purchase for around $14 million of a put on the 10-year note futures contract, anticipating the corresponding yield will reach 5% by its Nov. 20 expiration date.

Benchmark oil prices climbed more than 5% to the highest since May, advancing towards peak levels reached since the US attacked Iran in late February.

Rising energy prices hit government bond markets globally, with UK two-year yields climbing 17 basis points. Euro-zone bond markets slumped after the European Central Bank raised interest rates by a quarter point to 2.5%, as expected. The second increase since the Iran war began was based on signs inflation will remain “well above target for an extended period,” the ECB said.

“Crude oil drives inflation, and if it starts getting into the system it’s going to be hard to contain it,” said Tony Farren, managing director in rates sales and trading at Mischler Financial Group. “There’s no reprieve for yields to go lower if inflation remains elevated.”

A U.S. report on producer prices, meanwhile, showed increases that were largely in line with economist expectations. Bond investors are more keenly interested in Friday’s consumer price index data as a determinant of what the Fed will do on Sept. 16.

What Bloomberg strategists say…

“PPI data has only reinforced the case for tighter policy and, at the margin, gives the rise in yields a firmer fundamental footing. That said, some of it can be caveated by yet another sharp rise in oil. Either way, rates are repricing higher in what can only be classified as a global phenomenon.”

— Brendan Fagan, Macro Strategist, Markets Live

While rising oil prices have pressured the market, bond yields globally are also rising in response to growth in the supply of debt securities, both from governments financing deficits and from companies funding capital expenditures.

Bank of America projected that net Treasury supply will increase to about $2.3 trillion in 2028 from $1.9 trillion this year, in part because growth in the total debt caused annual interest expense to double over the past five years to more than $1.2 trillion.

Investor anxiety about U.S. government spending has been stoked further by the prospect of a protracted war in the Middle East. A pledge by U.S. President Donald Trump in a late-Wednesday speech to give all adult U.S. citizens a $5,000 dividend if Republicans retain control of both houses of Congress at the November mid-term elections — though viewed as unlikely to be kept — also was viewed as a threat to the fiscal outlook.

Meanwhile, investment-grade corporate bond sales set records in four of the past eight months, including the last three, and volume is tracking 7.6% above 2020 levels, when a record $1.75 trillion was sold. A seasonal surge this week, predicted to total $70 billion, had reached $61 billion by Wednesday.

–With assistance from Michael MacKenzie.

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