TREASURIES-US yields extend rise after 20-year auction, deficit eyed

By Karen Brettell and Chuck Mikolajczak

May 21 (Reuters) - U.S. Treasury yields were mostly higher on Wednesday, extending their ascent after a weak auction of 20-year bonds as investors continued to monitor the progress of a tax bill in the U.S. Congress.

A $16-billion sale of 20-year bonds US20YT=RR saw soft demand, with a high yield of 5.047%, in what was seen as a test of foreign demand for U.S. debt, as concerns over the fiscal and inflation outlook increase.

A deteriorating fiscal outlook has captured the market's attention this week after Moody's Investors Service on Friday cut the United States’ sovereign credit rating from the top "Aaa."

The yield on the 20-year note climbed to 5.125% after the auction, its highest level since early November 2023. It was last up 12.4 basis points to 5.114%.

"The interest rate environment is reflecting concerns regarding U.S. (budget) deficits, with some estimates around the new tax bill showing it would add trillions to the deficit," said George Cipolloni, portfolio manager at Penn Mutual Asset Management.

"(Long-term) yields of 5% with another auction not doing well is not a sign people are feeling good about the U.S. economy."

Yields at the longer end of the Treasury curve have been rising steadily this month, driven by domestic fiscal concerns and worries that President Donald Trump's unpredictable economic policies will not only stoke inflationary pressures but also erode the appeal of U.S. assets. Yields in Japan and the euro zone have risen too this week.

Some investors are concerned that the tax and spending bill has fewer spending cuts than previously hoped.

The bill faces a critical test on Wednesday as a handful of Republican House representatives headed to the White House over concerns it does not sufficiently cut spending.

The yield on the benchmark U.S. 10-year Treasury note US10YT=RR jumped 11.2 basis points to 4.593% after hitting a three-month high of 4.607%.

The yield on the 30-year bond US30YT=RR shot up 11.6 basis points to 5.083% after reaching 5.098%, its highest since October 2023.

Longer-dated yield increases have been due to "a combination of concern over inflation and fiscal" issues, with easier tax policies being a newer factor in recent days, said Stephen Gola, head of U.S. Treasuries sales and trading at StoneX Group.

Gola noted that hedge funds have been putting on steepener trades, or bets that longer-dated yields will rise relative to shorter-dated ones, which could be having an outsized impact on market moves.

The Treasury will also sell $18 billion in 10-year Treasury Inflation-Protected Securities on Thursday.

The 2-year note US2YT=RR yield, which typically moves in step with interest rate expectations, rose 4.3 basis points to 4.013%.

The yield curve between 2-year and 10-year notes US2US10=TWEB steepened by 6 basis points to 57.4 basis points.

The break-even rate on five-year U.S. Treasury Inflation-Protected Securities US5YTIP=TWEB was last at 2.435% after closing at 2.423% on Tuesday.

The 10-year TIPS break-even rate US10YTIP=TWEB was last at 2.368%, indicating the market sees inflation averaging about 2.4% a year for the next decade.