TREASURIES-US yields rise on strong data, before auction

Updated in New York morning time

By Karen Brettell

NEW YORK, Jan 7 (Reuters) - Benchmark 10-year Treasury yields hit an eight-month high on Tuesday after better than expected data pointed to a strong economy before a Treasury auction of $39 billion of the notes.

U.S. job openings in November grew to 8.098 million, exceeding forecasts for a 7.7 million rise, and higher than October's numbers of 7.839 million.

U.S. services sector activity also accelerated in December, but a surge in a measure of prices paid for inputs to near a two-year high pointed to elevated inflation.

"It's giving the impression that the economy is re-accelerating," said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities in New York.

Goldberg said positive seasonality could be helping the data appear stronger than it is. "But optically speaking, that's what's really driving Treasuries here - that expectation that maybe things are actually getting a lot better," he said.

Interest rate-sensitive two-year note yields US2YT=RR were last up 2.9 basis points on the day at 4.299%.

Benchmark 10-year yields US10YT=RR rose 6.1 basis points to 4.677%, having peaked at 4.693%, the highest since May 1.

The yield curve between two-year and 10-year notes US2US10=TWEB steepened three basis points to 38.2 basis points, the steepest since May 2022.

Tuesday’s 10-year auction follows 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.

(Reporting by Karen Brettell; Editing by Jan Harvey and Barbara Lewis)

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