Treasury bond yields surge again after demand is weak at third debt auction

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Treasury bond yields are soaring for a third day after the government’s final debt auction of the week saw weak demand -- continuing the pattern of the previous two auctions.

The Treasury on Wednesday sold $29 billion of new seven-year notes at a yield of 2.43%, above the 2.40% analysts had been expecting.

As some investors stayed away, Wall Street bond dealers ended up buying 56.1% of notes, compared with the 45% average share of the market they took at the previous four seven-year note sales, according to CRT Capital Group.

Yields on Treasury issues are up mostly across the board. The 10-year T-note yield (charted at left), a benchmark for mortgages, has jumped to 3.12%, up from 3.03% on Tuesday and the highest since May 25.

Many analysts had expected some rebound in bond yields after safety-seeking investors pushed them last week to new 2011 lows. Money had poured into government bonds over the last two months amid rising investor concern about the weakening U.S. economy and as Europe’s government-debt crisis deepened.

But this week, demand for longer-term Treasuries hit a wall. The government had to pay more than expected to sell $35 billion of two-year notes Monday and $35 billion of five-year notes Tuesday.

Some of the dearth of demand reflects revived risk-taking, as investors shift back to stocks and commodities amid end-of-quarter portfolio shuffling. Fear that Greece would default on its debt has lessened as the country’s Parliament acted as expected Wednesday, approving austerity measures required as a precondition of further aid from the European Union.

European stock markets rallied sharply Wednesday, and U.S. stocks were on track for their third straight gain. The Dow Jones industrial average was up 73 points, or 0.6%, to 12,261 at about 12:30 p.m. PDT.

The Treasury market also may be on edge as the Federal Reserve gets set to end its $600-billion bond-buying program launched in November. That program will be completed Thursday, removing what had been a major source of demand for the securities.

A new warning from Standard & Poor’s about Washington’s game of brinkmanship over the U.S. debt ceiling probably isn’t helping the Treasury market, either.

Have investors simply had their fill of U.S. bonds for the moment?

“We still believe that despite the poor auction we will get some more significant dip buying in the days ahead,” analysts at Nomura Securities said in a note Wednesday.

-- Tom Petruno