(Bloomberg) — Treasuries tumbled after a trio of US government auctions drew relatively poor demand, signaling investor fatigue with market volatility stemming from repeated diplomatic failures to end the US military operation in Iran.
The $31 trillion market extended its losses after Thursday’s sale, with yields higher across maturities by four to eight basis points. This week’s two-, five-, and seven year notes were all sold at yields that were higher than indicated in the market — the worst showing by three auctions in a month since May 2024.
“We’ve had wild intraday volatility at unexpected moments based on various news headlines,” said Michael Cloherty, head of US rates strategy at CIBC Capital Markets. “It’s made people reluctant to add additional risk. When you have big liquidity events like auctions, it’s harder to clear them in that environment.”
All together, the US government sold $183 billion of fixed-rate debt this week, wrapping up its offerings for the month. The seven-year notes were sold at 4.255%, compared to the yield of 4.247% seen on similar debt at the auction deadline. Two- and five-year sales earlier this week drew even worse demand.
The lackluster appetite comes at a time when uncertainty about the length and economic impact of war in the Middle East drives energy prices higher and forces traders to recalibrate their expectations surrounding the Fed’s policy path.
Treasury yields have largely tracked oil prices since the US military action began on Feb. 28, disrupting the region’s supply. The prospect of higher inflation led traders to abandon wagers on Fed reductions this year, and to begin to price in a rate increase, an additional headwind for bonds.
The last time three auctions were met with similarly weak demand, back in May 2024, traders also were reducing their bets on Fed cuts.
The US benchmark crude oil contract, which closed at levels near $100 a barrel last week and tumbled on Monday after US President Donald Trump touted progress toward ending the war, climbed as much as 5.5% Thursday to about $95 after he threatened to intensify attacks.
Global bond markets rallied earlier this week on the potential for US-Iran diplomacy, but have returned to losses amid subsequent rejections of a deal and a re-escalation of threats.
The market’s volatility has also increased transaction costs, particularly for short-maturity tenors, interest-rate strategists at Morgan Stanley said yesterday. That could also account for some of the weakness seen at this week’s auctions.
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