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Bond Report: 10-year Treasury yield holds at five-month high following 20-year auction

U.S. Treasury yields traded mixed on Wednesday, with the 10-year rate hovering around a five-month high above 1.64% following Treasury’s 20-year auction.

A “sloppy, off-base market” obtained premium yield at the auction, according to FHN Financial’s Jim Vogel. Investors will now be watching for an account of business conditions in the Federal Reserve’s 12 districts in the Beige Book, which is due at 2 p.m. Eastern Time.

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What are yields doing?

The 10-year Treasury note yields
TMUBMUSD10Y,
1.640%

1.643%, versus 1.634% at 3 p.m. Eastern Time, which represented the highest rate for the benchmark bond since May 19, according to Dow Jones Market Data. It briefly rose above 1.65% immediately after the auction.

The 2-year Treasury note rate
TMUBMUSD02Y,
0.379%

was at 0.383%, down from 0.391%.

The 30-year Treasury bond rate
TMUBMUSD30Y,
2.114%

was at 2.122%, up from 2.087% on Tuesday, which represented its highest yield since Oct. 12.

What’s driving the market?

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The $24 billion auction of 20-year TreasurysBX:TMUBMUSD20Y was awarded at 2.1%, in contrast to the when-issued yield of 2.077%, according to FHN’s Vogel. Ben Jeffery of BMO Capital Markets called the auction “soft,” and said the sale resulted in modestly higher yields.

Investors will now be preparing to scour the upcoming Beige Book report for anecdotal information about the health of the U.S. economy at a time of growing inflation concerns.

Fed Governor Randal Quarles, appearing at the Milken Institute Global conference on Wednesday, said he sees “significant upside risks” to forecasts that inflation will decline sharply next year. He also said that he will support the decision at the Fed’s next meeting in November to start tapering asset purchases. Quarles stepped down from his role as vice chairman for supervision at the central bank last week, but he remains part of the Financial Stability Board until at least December.

Later Wednesday, San Francisco Fed President Mary Daly will be a part of a fireside chat at a symposium of central banking at 8:35 p.m.

Investors are particularly attuned to the prospects of a potentially faster pace of tapering, which would suggest that the central bank may be inclined to raise interest rates faster than expected to quell intensifying pricing pressures.

However, the market-implied odds of the Federal Reserve committing a policy mistake have jumped to around 40% from just under 25% two weeks ago, according to an analysis of the eurodollar curve done by Credit Suisse.

Read: Inflation ‘single biggest threat’ to markets and ‘society in general,’ says investor who called stock-market crash in 1987

What analysts are saying

Wednesday’s 20-year auction “was even sloppier than the oft-referenced February 2021 new issue that had previously been known as the weakest on record,” Jefferies LLC economists Thomas Simons and Aneta Markowska said in a note. Despite a “terrible auction,” “the issue continues to trade well on the curve and has more room to run.”

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