US yields climb after strong home sales data, soft five-year auction

WASHINGTON, Oct 25 – US Treasury yields on Wednesday climbed after an auction of five-year notes showed weak demand and following data indicating that new-home sales accelerated in September, affirming market expectations of prolonged high rates heading into 2024.

The yield on benchmark 10-year Treasury notes was up 11.5 basis points (bps) at 4.954%. It hit a 16-year high of more than 5% on Monday.

New home sales rebounded 12.3% to a seasonally adjusted annual rate of 759,000 units last month, the Commerce Department said on Wednesday. August sales were revised up to 676,000 units from the previously reported 675,000 units.

“Data continues to come in at a much more robust pace than most people would have thought it was going to be sitting at 5.5% through this cycle,” said Tim Sauermelch, head of global macro trading at SEI Investments.

“The fact that the economy is so resilient brings into question what rate of interest is actually restrictive,” he said.

In addition, mortgage rates approaching 8% could curb last month’s strong demand. Along with continued inflation and US economic strength, that may increase the odds the US Federal Reserve will keep interest rates elevated heading into next year to curb persistent inflation.

“The Fed has no choice but to continue to emphasize the message that interest rates are going to remain high for an extended period of time until they make enough progress on inflation,” said Hans Mikkelsen, head credit strategist at TD Securities.

A weak Treasury auction on Wednesday of USD 52 billion in US five-year notes also boosted yields. The auction stopped at a high yield of 4.899%, above the expected rate at the bid deadline, which suggested investors demanded a premium to buy the note.

Total bids were about USD 123 billion for a bid-to-cover ratio, a measure of demand, of 2.36, lower than the 2.52 seen previously and the 2.52 average. It is the weakest since September 2022, analysts said.

US five-year yields were last at 4.92%, up 9.4 bps.

“The Treasury markets going to stabilize, but it kind of shows you the auctions continue to be sloppy,” said John McIntyre, managing director at PGIM Fixed Income.”

“The markets struggling with new supply for now, and bonds yield moving higher and equities moving lower is not a great environmental for financial assets.”

The 30-year Treasury bond yield was up 12.9 bps at 5.091%.

The short end of the curve sold off as well, lifting the two-year yields, which typically reflect interest rate expectations, to 5.12%.

A closely watched part of the US Treasury yield curve measuring the gap between two- and 10-year Treasury yields, seen as an indicator of economic expectations, was at -16.8 basis points.

An inverted yield curve historically is seen as a precursor to recession. But this curve has been steepening of late, reflecting concerns about persistent inflation that have prompted the selling of long-dated Treasuries.

Investors have grown more wary of further Fed rate hikes if inflation remains higher.

October 25 Wednesday 3:07PM New York / 1907 GMT

(Reporting by Matt Tracy; Editing by Richard Chang, Gertrude Chavez-Dreyfuss and Jonathan Oatis)