US yields rise on solid data, weak 20-year auction

NEW YORK – US Treasury yields rose on Wednesday as solid economic data reinforced expectations that the Federal Reserve will keep rates on hold for the next several months, and the Treasury Department’s USD 16 billion sale of 20-year bonds attracted lacklustre demand.

Data showed that new orders for key US-manufactured capital goods increased more than expected in December and shipments of such goods surged, pointing to robust business spending on equipment and solid economic growth in the fourth quarter.

That was reinforced by separate data showing that production at factories increased in January by the most in 11 months.

“The data that we got today was pretty good,” said Tom di Galoma, managing director at Mischler Financial Group.

The US central bank is expected to keep rates steady over the coming few months as the jobs market appears relatively solid, albeit with signs of weakness, and as inflation eases.

Fed officials were in near-unanimous agreement on keeping interest rates on hold at their meeting last month, according to minutes of their January 27-28 meeting. They remained split, however, over what might happen next, with several policymakers raising the risk of possible hikes in borrowing costs if inflation remains elevated, while some also split over whether and when further cuts might be warranted.

Market participants are focused on whether data will show a more rapid deterioration in the labor market that could bring forward expected rate cuts.

“I characterize the jobs market as fragile right now. Fragile doesn’t mean broken, it just means at risk, and that if something breaks it could shatter,” said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott in Philadelphia.

The Fed’s Vice Chair for Supervision Michelle Bowman on Wednesday said she remains concerned about the labor market, describing the latest jobs report as strange.

LeBas also noted that the Treasury market has rallied since data last week showed sales of previously owned homes dropped 8.4% in January to the lowest level since December 2023.

The two-year note yield, which typically moves in step with Fed interest rate expectations, rose 2.3 basis points to 3.46%. It hit a four-month low of 3.385% on Tuesday.

The yield on benchmark US 10-year notes rose 2.7 basis points to 4.081%. It dropped to 4.018%, the lowest since November 28, on Tuesday.

The yield curve between two- and 10-year notes was little changed on the day at 62 basis points.

Yields extended their rise after a weak 20-year auction.

The Treasury sold the bonds at a high yield of 4.664%, about 2 basis points above where they had traded before the sale.

Demand was 2.36 times the amount of debt on offer, the weakest since at least April 2023, and dealers took a larger share than usual, indicating weak investor interest.

Yields also rose after falling on Tuesday toward technically significant levels.

“Anytime you get close to 4% on 10-year notes, it’s probably a good zone to be selling,” said di Galoma, adding that the market likely needs a fresh catalyst, such as the change in Fed Chair, for yields to continue lower.

Former Fed Governor Kevin Warsh is due to replace Fed Chair Jerome Powell when his term ends in May.

The Treasury will sell USD 9 billion in 30-year Treasury Inflation-Protected Securities on Thursday.

(Reporting by Karen Brettell; Editing by David Holmes and Edmund Klamann)