TREASURIES-US bonds slide again as stock rally, weak five-year note auction sap demand

By Gertrude Chavez-Dreyfuss

NEW YORK, Feb 25 (Reuters) - U.S. Treasuries slid for a second straight session on Wednesday, as risk appetite perked up with the rally in stocks and following lackluster demand for U.S. five-year notes at an auction.

The market also tracked equities, with Wall Street shares climbing and lifting the S&P 500 and Nasdaq to two‑week highs amid improving sentiment toward AI names.

Nvidia's NVDA.O earnings, set for release after the close, have become the focal point even for fixed-income players seeking evidence that its profit growth is keeping pace with Big Tech's massive $630  billion capital spending plans for 2026.

"It looks like the traditional relationship between stocks and bonds are back," said Zachary Griffiths, head of investment grade and macro strategy at CreditSights in Charlotte, North Carolina.

He noted that the correlation between the U.S. 10-year yield and the S&P 500 has hit 0.72, the highest since the collapse of Silicon Valley Bank in March 2023.

"The breadth of AI concerns and how it's impacting software and how it could have broader implications in other sectors seem to be having more of a correlated impact across markets relative to what we've grown accustomed to in the past."

Investors are again seeing bonds and stocks move in tandem, in part because many expect the Federal Reserve to keep interest rates steady in the near term, pushing the Fed's influence further into the background, said Chip Hughey, managing director of fixed income at Truist Wealth in Richmond, Virginia.

SOFT AUCTION

Also on Wednesday, the Treasury auctioned $70 billion in U.S. five-year notes to weak demand.

The auction cleared at 3.615%, marginally above the expected rate at the bid deadline, suggesting investors required a slightly higher yield to take down the note. The bid-to-cover ratio, another gauge of demand, was 2.32X, lower than the six-auction average of 2.36X.

Dealers absorbed 12.8% of the five‑year note supply, the highest share since March 2025 and well above the 10.1% recent average. The elevated take‑down indicates that primary dealers had to step in and backstop the auction, suggesting that end‑user demand was softer than usual.

Some analysts before the sale had expected a weak auction given lower outright yields. Lower yields typically dampen investor appetite because it means that the note has become expensive.

Since the last five‑year note auction in January, the yield has fallen by about 20 basis points.

Post-auction, U.S. five-year yields rose 2.3 basis points (bps) to 3.619% US5YT=RR.

The Treasury on Wednesday also sold $69 billion in 17-week bills and $28 billion in two-year floating-rate notes.

There is also ample corporate bond supply this week, analysts said, with roughly $49 billion in fresh investment grade debt in the first two days alone. More deals are expected with a forecast of about $52 billion-$57 billion bond supply this week, analysts said.

That pulled down Treasury prices, too.

Wall Street dealers typically seek to lock in borrowing costs when underwriting corporate bonds. To hedge against interest rate fluctuations, they sell Treasuries ahead of the bond issuance. Once the deal is completed, they unwind the hedge by buying back Treasuries — a process known as exiting the "rate lock."

CURVE STEEPENS

In afternoon trading, the benchmark 10-year yield was up 1.7 bps at 4.05% US10YT=RR, while 30-year yields were modestly up on the day at 4.696% US30YT=RR.

On the front end of the curve, the two-year yield, which reflects rate expectations, rose 1.7 bps to 3.471% US2YT=RR.

The yield curve steepened a touch on Wednesday, with the gap between two-year and 10-year yields rising to 57.5 bps US2US10=TWEB from 56.6 bps late on Tuesday.

Prior to Wednesday, the curve had flattened for 10 straight sessions, a move in which short-term yields rise relative to longer-dated Treasuries. It was the longest such stretch since November 2015.

"Since the January labor report (which showed an unexpected surge), we have seen Fed rate cut expectations dialed back a bit and that has contributed a little bit to the flattening with some upward pressure in short-dated yields," said Truist's Hughey.

U.S. fed funds futures on Wednesday priced in about 53 bps on easing this year, compared with 56 bps late on Tuesday. That's equivalent to about two rate cuts of 25 bps each, an outlook that has been in place since the beginning of 2026. The first rate cut is not expected until July or September.