August 28, 2018 / 7:25 PM / 8 months ago

TREASURIES-NAFTA progress, demand at 5-year note auction buttress yields

(Adds analyst quote; updates headline, yields)

By Kate Duguid

NEW YORK, Aug 28 (Reuters) - U.S. Treasury yields on Tuesday rose across maturities to weekly highs as fears of a global trade war abated a day after the United States and Mexico agreed on an overhaul of the North America Free Trade Agreement, and following fair demand at auction for $37 billion of five-year notes.

The easing of trade tensions prompted investors to reduce safe-haven positions in U.S. government debt. Sales of long-term Treasuries in particular pressured prices and drove yields up more at the long end of the curve, indicating bullishness about the economic outlook.

“There’s a bit of optimism on trade because of what’s going on with Mexico so far. It’s probably far from over, but it’s a very positive sign,” said Gene Tannuzzo, senior portfolio manager, Columbia Threadneedle Investments.

The agreement between the United States and Mexico to overhaul NAFTA puts pressure on Canada to agree to new terms on auto trade and dispute settlement rules to remain part of the deal.

Wall Street’s S&P 500 and Nasdaq stock indexes rallied to record highs on expectations Canada would sign on to the deal and ease the economic uncertainty caused by U.S. President Donald Trump’s repeated threats to ditch the 1994 accord.

Yields were also up modestly following the well-received $37 billion auction of five-year notes on Tuesday afternoon, a $1 billion increase in supply from July. Demand was fair, with indirect bidders - traditionally used as an indication of foreign interest - taking 66.24 percent, slightly less than 67.20 percent the previous month. Direct bidders took 9.01 percent versus 8.70 percent last month.

The results of Tuesday’s auction “aren’t super impressive, but they are encouraging in the context of today’s broad market cheapening,” said Thomas Simons, senior money market economist at Jefferies.

The bid-to-cover ratio, a gauge of overall interest, fell to its lowest since April this year. There was, however, no difference between the highest yield on Treasuries during the auction and the expected high yield when bidding started. That suggests demand for the increasing pool of supply - the five-year auction was the largest since July 2010 - remains strong.

The yield on the U.S. benchmark 10-year Treasury note was last up 3.5 basis points at 2.886 percent, after also rising 2.9 basis points on Monday’s trade news. The 30-year bond yield rose 3.5 basis points to 3.034 percent, after rising 2.8 basis points Monday.

The short end of the curve moved less, with the two-year note yield up less than a basis point. This steepened the yield curve, with the spread between two- and 10-year yields 2.5 basis points wider at 21.5 basis points and the spread between the five- and 30-year yields also up modestly, last at 25.8 basis points. (Reporting by Kate Duguid; Editing by Alistair Bell and Chizu Nomiyama)

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