TREASURIES-US yields rise ahead of 5-year note auction, amid slew of corporate supply

By Tatiana Bautzer

NEW YORK, May 28 (Reuters) - Yields on U.S. Treasuries rose on Wednesday ahead of a record $70 billion five-year note auction later in the session that could once again test demand for the country's government debt.

A slew of large corporate bond issues seeking to take advantage of improving market conditions also lifted Treasury yields, analysts said. Corporate supply has spurred selling of Treasuries, pushing their yields higher for hedging purposes.

Ahead of a bond and note auction, investors tend to sell Treasuries to push up the yield before buying them back at a lower price, a practice called concession.

In the case of corporate bonds, Wall Street dealers typically looked to lock in borrowing costs for these deals that they are underwriting. As part of that process, a dealer sells Treasuries as a hedge to lock in the borrowing cost on the bond issue before the deal is completed. Once the bond is sold, the dealer buys Treasuries to exit the "rate lock."

In midday trading, the yield on the benchmark U.S. 10-year Treasury note US10YT=TWEB rose 6.1 basis points (bps) to 4.495%. U.S. 30-year yields advanced 6.2 bps to 5.00%US30YT=TWEB, as demand for longer-dated securities has been weakening in major markets.

"The results on the two-year auction on Tuesday were fine, but markets are worried about the five-year and seven-year auctions," said Stan Shipley, fixed income strategist at Evercore ISI.

The Treasury is expected to offer $44 billion in seven-year notes on Thursday.

Ahead of the auction, U.S. five-year yields were up 5.7 bps at 4.079% US5YT=RR.

New announcements of corporate investment grade offerings also contributed to elevate yields, Shipley added. Among the issuers are BNG Bank, AT&T, Georgia Pacific, Cascades and Florida Gas Transmission, according to Action Economics.

Indexes for manufacturing and services activities released by the Richmond Fed on Wednesday that showed deceleration in both sectors did not have a lot of influence on markets, according to Mischler Financial Group managing director Tom Di Galoma.

Overnight, the Japanese government had another poor result in its 40-year bond auction on Wednesday, contributing to global pressure on longer term yields. Japanese government bonds have become the "canary in the global duration coalmine," Goldman Sachs analysts wrote last week after a very poor sale of 20-year bonds.

The two-year US2YT=TWEB U.S. Treasury yield, which typically moves in step with interest rate expectations, rose 4.3 bps to 3.992%.

After the release of the Treasury auction results, investors are also going to scrutinize the minutes from the latest Federal Reserve's Open Market Committee's meeting.