TREASURIES-US 30-year yields hit 19-month high tax on fiscal, debt supply concerns

By Karen Brettell

NEW YORK, May 22 (Reuters) - Longer-dated Treasury yields gained on Thursday with 30-year yields reaching the highest in 19 months as a worsening fiscal outlook for the United States raises concerns about demand for U.S. government debt.

The Republican-controlled U.S. House of Representatives passed by a single vote on Thursday a sweeping tax and spending bill that would enact much of President Donald Trump's policy agenda and saddle the country with trillions of dollars in debt.

Soft demand for a $16 billion sale of 20-year bonds on Wednesday increased concerns about falling interest in U.S. debt. The auction was the first since Moody’s Investors Service cut the United States sovereign rating from the top “Aaa” on Friday.

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

“You've had a variety of factors that seem to be calling into question demand for longer duration Treasuries and maybe demand for longer duration sovereign bonds,” said Zachary Griffiths, head of IG and macro strategy at CreditSights.

The Treasury Department is expected to need to increase most of its longer-dated debt auction sizes later this year or next year as the deficit worsens.

Japanese government bond yields have surged following a weak 20-year Japanese debt auction earlier this week. That has raised concerns that Japanese investors will move away from Treasuries as Japanese bonds become more attractive.

Inflation fears are also weighing on longer-dated debt demand as the Trump administration continues to work on trade deals that will maintain tariffs, but in most cases below the levels that were initially implemented.

“There's a lot of debate around if tariffs are a one-time increase in the price level and it's done, or if there's a more sustained inflationary impulse from tariffs and we're in the latter camp. We think there's a lot of knock-on effects of the direct tariffs,” said Griffiths.

The 2-year note US2YT=RR yield, which typically moves in step with interest rate expectations, fell 2.1 basis points to 3.996%.

The yield on benchmark U.S. 10-year notes US10YT=RR rose 0.8 basis points to 4.605%, after earlier reaching 4.629%, the highest since February 12.

The yield curve between two-year and 10-year notes US2US10=TWEB steepened 3 basis points to 61 basis points, the steepest since April 22.

The 30-year bond US30YT=RR yield rose 3.7 basis points to 5.127% and earlier hit 5.161%. It is closing in on October 2023's 5.179%, a break past which would take it to its highest since mid-2007.

Fiscal and debt supply concerns have come to the fore in a week that is otherwise light on major economic releases to drive market direction.

Data on Thursday showed that the number of Americans filing new applications for unemployment benefits dropped last week, suggesting the economy maintained a steady pace of job growth in May.

Federal Reserve officials this week have indicated they expect to continue to hold rates steady as they wait to see how trade policies impact economic data. Fed funds futures traders see the U.S. central bank as most likely resuming rates cuts in September.