U.S. Treasury yields rise after weak 10-year note auction

Longer-dated U.S. Treasury yields were higher on Wednesday, after a weak auction of 10-year notes by the Treasury, while the market awaits President Donald Trump's choice to fill a slot on the Federal Reserve's Board of Governors.

Yields extended their gains after a $42 billion auction in 10-year notes was seen as soft by analysts, with demand at 2.35 times the notes on sale the weakest in a year. Primary dealers took 16.2% of the sale, the highest percentage in a year and indicative of slack demand, according to Lou Brien, strategist at DRW Trading in Chicago.

The sale follows a somewhat disappointing auction of $58 billion in three-year notes (US3YT=RR) on Tuesday and comes ahead of a $25 billion auction of 30-year bonds on Thursday.

"It was another kind of poorly subscribed auction ... between record size and relatively expensive rates for the type of environment we're in, it wasn't very conducive to good sales this week," said Kim Rupert, managing director, global fixed income at Action Economics in San Francisco.

"And the market is still trying to digest the employment report, and then the ISM services yesterday, all of the Fed goings on, so I think investors were just a little bit more hesitant to take down this paper."

Prior to the auction, yields briefly spiked, with the 10-year yield hitting a session high of 4.283% and coincided with a sharp move lower in Treasury futures (TYcv1), which Rupert said could have been due to hedging in case of a poor auction or someone trying to "cheapen up" the market heading into the sale.

Yields have been moving lower in recent sessions, including a steep drop on Friday, following a weak government payrolls report and an announcement from the Fed that Governor Adriana Kugler was resigning early, which bolstered market expectations for a rate cut from the central bank at its September meeting.

Data on Tuesday, however, from the Institute for Supply Management showed a slowing in the services sector and indicated price pressures had increased. That helped to cool expectations for a cut and sent yields on shorter-dated yields higher.

The yield on the benchmark U.S. 10-year Treasury note (US10YT=TWEB) rose 2.8 basis points to 4.224% and was poised to snap a four-session streak of declines.

Trump said on Tuesday he will decide on a nominee to fill Kugler's vacancy, after she leaves on Friday, by the end of the week.

The yield on the 30-year bond (US30YT=TWEB) climbed 4.4 basis points to 4.813%.

Minneapolis Fed President Neel Kashkari said on Wednesday the Fed may need to cut rates in the near term to account for a slowing economy, although it remains unclear how long it will take for the effect of tariffs to become apparent.

Federal Reserve Governor Lisa Cook said that the moderation in the pace of hiring in Friday's employment data was "concerning," while Boston Fed President Susan Collins said uncertainty leads to a "wait and see" approach to price setting.

A part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes (US2US10=TWEB) that market participants monitor as an indicator of economic expectations, was at a positive 51.7 basis points after hitting a 2-1/2 week high of 54.9 on Monday.

The two-year (US2YT=TWEB) U.S. Treasury yield, which typically moves in step with interest rate expectations for the Fed, shed 0.8 basis point to 3.708%.

Market expectations for a September rate cut of at least 25 basis points from the Fed stood at 95.2%, up from the 92.9% in the prior session and well above the 46.7% from a week ago, according to CME's FedWatch Tool.