Benchmark 10-year yields ease as debt ceiling talks continue

NEW YORK, May 23 (Reuters) – Benchmark 10-year U.S. Treasury yields edged down from two-month highs reached earlier on Tuesday as traders focused on when Congress will reach an agreement to raise the debt limit and after the Treasury Department saw strong demand for an auction of two-year notes.

Yields on one-month bills, meanwhile, which are being shunned on concerns about payments coming due when the Treasury is most at risk of running out of money, eased from a record high.

Optimism that U.S. lawmakers are nearing a deal to raise the debt ceiling helped send longer-dated yields higher earlier on Tuesday, but they fell back as it appeared that the negotiating parties still face large differences.

Representatives of President Joe Biden and congressional Republicans ended another round of debt ceiling talks with no signs of progress as the deadline to raise the government’s $31.4 trillion borrowing limit ticked closer.

Investors are focused on “the prospect that somehow the Treasury and Congress and the White House reach the X date without a resolution,” said Thierry Wizman, Macquarie’s global FX & rates strategist in New York.

Benchmark 10-year yields US10YT=RR were last down two basis points on the day at 3.696%, after earlier reaching 3.761%, the highest since March 13.

Yields on U.S. one-month Treasury bills eased to 5.594%, after earlier reaching a record high of 5.888%.

Hawkish comments from Fed officials this week helped to send yields higher, in turn leading traders to price in a higher chance of a rate hike in June and reduce their expectations for rate hikes later this year.

Fed funds futures traders are now pricing in a 28% chance of an additional 25 basis points rate increase in June.

The Treasury saw strong demand for a $42 billion sale of two-year notes on Tuesday, which sold at a high yield of 4.30%.

Demand for the debt was 2.90 times the amount on offer, the highest ratio since January.

May 23 Tuesday 2:45PM New York / 1845 GMT

(Reporting by Karen Brettell; Additional reporting by Gertrude Chavez-Dreyfuss and Herb Lash in New York and Stefano Rebaudo in London; Editing by Marguerita Choy, Kirsten Donovan and Andrea Ricci)