Treasury bond yields surge amid sudden selling wave

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The Treasury bond market is suffering a blistering sell-off Wednesday that has sent yields soaring to their highest levels in at least two months.

At about 11:10 a.m. PDT the yield on the 10-year T-note had rocketed to 3.81% from 3.67% on Tuesday.
The two-year T-note yield was at 1.08%, up from 0.96% on Tuesday.

Traders said the market seemed to wake up Wednesday to face a host of risks, including that the Federal Reserve most likely is getting closer to tightening credit, and that the U.S.-China battle over the latter’s trade and currency policies could get uglier -- and further drive the Chinese away from buying U.S. bonds.

And, of course, there is the issue of the ever-rising supply of new Treasury debt as the federal deficit balloons.

The market had been absorbing that supply with relative ease in recent months. Wednesday, investors finally appeared to balk: The Treasury saw surprisingly weak demand at its sale of $42 billion in five-year notes. The notes sold at a yield of 2.60% instead of the 2.56% that the market had expected.

The sell-off in Treasuries worsened after the auction results were announced.

A surge in the dollar, on fresh worries about the debt woes of Greece, Portugal and other European countries, might have been expected to bolster the Treasury market, but it hasn’t worked out that way.

Tom Tucci, head of government bond trading at RBC Capital Markets in New York, pointed to one other factor hitting Treasuries: bond selling by Japanese institutional investors, who as usual at this time of year are raising cash ahead of the end of Japan’s corporate fiscal year (March 31).

Japanese buying of Treasuries in recent months has been making up for China’s lack of interest.

-- Tom Petruno