TREASURIES-US yields rise before 10-year auction

By Karen Brettell

NEW YORK, Jan 7 (Reuters) - Benchmark 10-year Treasury yields hit an eight-month high on Tuesday before a Treasury auction of $39 billion of the notes, and as traders continued to evaluate the economic impact of policies under the incoming Donald Trump administration.

Tuesday’s 10-year auction comes after the U.S. government saw soft demand for a $58 billion sale of three-year notes on Monday. The Treasury will also sell $22 billion in 30-year bonds on Wednesday.

Heavy corporate debt issuance is also seen weighing on the market.

Treasury yields have increased despite the Federal Reserve cutting interest rates by 100 basis points since September. The U.S. central bank is expected to be more cautious in making further rate reductions this year as long as inflation stays above the Fed’s 2% annual target.

“The market is really pricing for a higher terminal rate…right around 4% is where we're at right now and that's only 25 basis points from where the funds rate is now,” said Dan Mulholland, head of rates – trading and sales at Crews & Associates in New York.

Analysts expect policies including tax cuts and looser business regulations introduced by Trump and the Republican-led Congress will boost growth, while others including a clampdown on illegal immigration and tariffs could add to inflation.

Concerns over the longer-term fiscal trajectory are also leading longer-term U.S. Treasury yields higher, with the U.S. budget deficit expected to continue to worsen.

“The market is building more term premium into the long end to account for the fiscal situation, the deficit, and potentially a lot more issuance in the long end of the curve,” Mulholland said.

Interest rate-sensitive two-year note yields US2YT=RR were last down 0.2 basis points on the day at 4.268%.

Benchmark 10-year yields US10YT=RR were up 1.6 basis points at 4.632%, having peaked at 4.646%, the highest since May 2.

The yield curve between two-year and 10-year notes US2US10=TWEB steepened one basis point to 36.4 basis points and earlier reached 37.2 basis points, the steepest since May 2022.

(Reporting by Karen Brettell; Editing by Jan Harvey)

((karen.brettell@thomsonreuters.com;))