US bond yields for various maturities generally rose to the highest level since the beginning of the month during volatile trading on Tuesday. Two new bond bids where demand was quite low raised the market's concerns about demand for US Treasury bonds.

By the end of the New York session, 10-year US Treasury yields rose 9.2 basis points to 4.555%, breaking the highest level since May 3. Yields on other US bonds also generally rose. Among them, 2-year US Treasury yields rose 3.4 basis points to 4.987%, 5-year US Treasury yields rose 7.6 basis points to 4.602%, and 30-year US Treasury yields rose 10.2 basis points to 4.668%.

Peter Boockvar, strategist at The Boock Report, said, “After poor performance in the 5-year treasury bond bid, US bond yields rose to the highest point of the day. Prior to that, the 2-year US bond auction held earlier in the day was also mediocre.”

On the first trading day after the Memorial Day holiday, the US Treasury bid on a total of 297 billion US dollars of US Treasury bonds and short-term treasury notes on Tuesday. This week, the US Treasury's bid sales totaled more than 600 billion US dollars.

In the $70 billion five-year treasury bond bid, the final bid interest rate was 4.553%, higher than the pre-issuance rate of 4.540%, which also meant that the final interest rate spread, reflecting weak demand, reached 1.3 basis points — the largest since January. The bid multiplier for this bid was 2.30 times, lower than 2.47 times the previous bid. This is the weakest bid ratio since September 2022.

Demand for the $69 billion two-year US bond bid, which was carried out earlier, was also relatively sluggish. The results showed that the bid interest rate for the new round of two-year US bond sales was 4.917%, the highest since October last year. The bid interest rate was 1 basis point higher than the pre-issue interest rate of 4.907% — for the third time in the past four 2-year US bond auctions, there was a trailing interest rate spread. The bid multiplier for US bonds in the current two-year period was 2.41 times, the lowest level since November 2021.

Regarding a series of US bond tenders on Tuesday, Tom Simons, an economist at Jefferies Group in New York, said, “The nominal supply of treasury notes and treasury bonds reached 297 billion US dollars on Tuesday. I think it is to be expected that there is some indigestion in the market.”

However, Simons is still relatively optimistic overall. He said, “I saw a headline saying that due to weak demand for bidding, no one will pay attention to these treasury bonds. But in fact, although the final bid yield and bid multiplier were not the best, they were far from concerns that demand was too weak.”

Judging from the news, in addition to the poor bid sales of US bonds on Tuesday, there are also a number of other factors that have dragged down the bond market to a certain extent. For example, the American Advisory Council's Consumer Confidence Report shows that the consumer confidence index unexpectedly improved in May after three consecutive months of deterioration. Since then, US longer-term Treasury yields have turned higher, while short-term bond yields have curtailed their decline.

A series of recent statements surrounding interest rate hikes by hawkish Federal Reserve official Kashkari have also received market attention. The Minneapolis Federal Reserve chairman said on Tuesday that Fed policymakers have not completely ruled out the possibility of further rate hikes. “I think the probability of interest rate hikes is low, but I don't want to rule out any possibility”.

In an interview earlier in the day, Kashkari also said that officials should wait for more evidence of cooling inflation before cutting interest rates, especially given the strong labor market and resilient economy.

Of course, given that later this week, the US Treasury will launch a repurchase operation for some old treasury bonds, and the PCE price index, the Federal Reserve's most popular inflation indicator, will also be released on Friday. Whether the fatigue in the bond market at the beginning of the week will continue for the rest of the week is still difficult to determine.

Chris Larkin, a strategist at E*Trade, a trading platform owned by Morgan Stanley, said, “This week may be short, but it looks like it's going to be very busy. As the minutes of last week's FOMC meeting showed a hawkish tone, traders will be anxious to see lukewarm data that could make it easier for the Fed to cut interest rates.”

Stan Shipley, managing director and fixed income strategist at Evercore ISI in New York, said: “The market is looking for data that shows a slowdown in the economy or inflation. Right now, there are no obvious signs of this. So we're in this wait-and-see model until something happens: either the economy or inflation slows further, or we're here to experience 3% growth and 3% inflation.”

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