December 26, 2017 / 7:23 PM / a year ago

TREASURIES-Two-year U.S. Treasury yields highest since 2008

 (Adds auction results, quotes; Updates prices)
    * Treasury to sell $88 billion coupon-supply this week
    * U.S. expected to increase auction sizes in 2018
    * Trading conditions thin after Christmas holiday

    By Karen Brettell
    NEW YORK, Dec 26 (Reuters) - Two-year U.S. Treasury yields
rose to their highest levels in nine years on Tuesday as
investors focused on new supply being sold into light trading
conditions this week, and on large increases in issuance
expected in 2018.
    The United States sold $26 billion in two-year notes on
Tuesday, the first sale of $88 billion in new short- and
intermediate-dated coupon-bearing supply this week.
    The auction attracted below average demand from investors,
as expected with many traders and investors away after Monday's
Christmas holiday. The ratio of bids to the amount of two-year
Treasuries offered              was 2.52, the lowest reading in
a year.             
    “It was mediocre. It didn’t surprise,” said Lou Brien, a
market strategist at DRW Trading in Chicago.
    The Treasury Department will sell $34 billion in five-year
notes on Wednesday and $28 billion in seven-year notes on
Thursday. It will further auction $13 billion in two-year
floating-rate notes on Wednesday.
    Investors are also preparing for the U.S. government to
increase auction sizes next year for the first time since 2008
to make up for declining purchases by the Federal Reserve.
    "The short-end has been too low for most of this month in
terms of yield," said Jim Vogel, an interest rate strategist at
FTN Financial in Memphis, Tennessee. "We think that's going to
take another move up once January gets here and people start
concentrating on additional Treasury supply."
    The Treasury is expected to initially concentrate increases
in supply in Treasury bills and short- and intermediate-dated
    Two-year Treasury yields            were last 1.908 percent,
up from 1.895 percent on Friday. The yields rose as high as
1.916 percent in overnight trading, the highest since Oct. 14,
    Five-year note yields            rose as high as 2.263
percent, the highest since April 12, 2011.
    Illiquid trading conditions were seen as exacerbating the
    “You have to attribute the movements partly to the time of
year,” said DRW's Brien.
    Short- and intermediate-dated debt is also highly sensitive
to interest rate hikes, which can send their yields higher.
    The Fed has indicated that an additional three increases are
likely next year, though interest rate futures traders are
pricing in only two.

 (Editing by Will Dunham and Chizu Nomiyama)
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