October 9, 2018 / 9:23 PM / in 13 days

UPDATE 1-Wall Street dealers absorb rising U.S. Treasury supply

    * Bond dealers buy most U.S. 2-year notes since 2014
    * Fund manager purchases of latest supply in line with
recent
average
    * Foreigners buy fewer 2- and 7-year notes; more 5-year debt

 (Recasts, adds background)
    By Richard Leong
    Oct 9 (Reuters) - Wall Street's bond firms are sopping up a
growing amount of Treasury debt as the U.S. government seeks to
fund a rising budget deficit stemming from the massive tax cut
enacted last December, Treasury Department data released on
Tuesday showed.
    In late September, the Treasury sold a combined $106 billion
in two-year, five-year and seven-year fixed-rate debt to soft
investor demand.                          
    The Treasury will sell three-year, 10-year and 30-year bond
supply this week, worth $74 billion.
    In addition to the growing debt stockpile, analysts blamed
last week's sharp bond market sell-off on inflation worries
stemming from upbeat economic data, which may result in a faster
pace of interest rate increases from the Federal Reserve.
    Rising bond yields and the trade spat between Washington and
Beijing have boosted the dollar, reducing overseas demand for
Treasuries in recent months.
    Growing U.S. yields appeal to some foreign investors, but a
lofty greenback has made it more expensive to hedge against
other currencies, analysts said.
    The benchmark U.S. 10-year Treasury note's yield            
hit a seven-year high at 3.261 percent on Tuesday. 
    In Japan, investors reduced their U.S. bond holdings in
August when U.S. yields were lower than current levels.
            
    At the Treasury auctions two weeks ago, foreign investors
bought fewer two- and seven-year debt issues than in the
previous month, but they purchased $4.337 billion in five-year
notes, the most since March. 
    As foreign purchases at Treasury auctions have waned, bond
dealers have increased their buying, though they prefer to
resell them quickly at a profit.  
    Wall Street's 23 top bond firms, or "primary dealers," in
particular may have done so to comply with requirements to
maintain their status to do business directly with the Federal
Reserve. 
    In late September, bond dealers bought $17.701 billion in
two-year notes, the most since July 2014 and up from $15.698
billion the previous month.
    They purchased $13.734 billion in five-year debt at a
decade-high yield of 2.997 percent. That was the highest amount
they bought since July 2016 and up from $9.802 billion in late
August.
    They bought $8.379 billion in seven-year notes, the most
since September 2016 and up from $7.151 billion a month earlier.
    The two- and seven-year notes were sold at decade-high
yields of 2.829 percent and 3.034 percent, respectively.
    Investment funds' purchases at the Treasury auctions in late
September were within their recent average, the Treasury data
showed.             

 (Reporting by Richard Leong; Editing by Dan Grebler)
  
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