U.S. Treasury bonds edged modestly higher Tuesday following a key auction of new 10-year notes that falls just ahead of August inflation data as well as myriad challenges for the government's borrowing effort.
The Treasury sold $35 billion in re-opened 10-year notes as part of the government's quarterly funding effort, which aims to raise around $103 billion by the end of September, at a high auction yield of 4.289%, the highest in any 10-year auction since 2007.
Demand in today's auction, which falls less than 24 hours ahead of the Commerce's Department's August inflation report, was notably weaker-than-expected and could prove crucial for broader market sentiment over the coming weeks.
Potential buyers bid $2.52 for every $1 on offer from the Treasury, generating a so-called 'bid to cover' ratio of 2.52x, down from the 2.56x recorded at last month's sale, when the yield was 3.999%.
Bond yields move in the opposite direction of prices, meaning today's sale would have been seen as a significant discount to the August auction.
Foreign buyers took up 66.3% of the $34 billion sale, down from the 72.2% figure reported in August and below the near-term average of around 67.7%. A $44 billion sale of 3-year notes yesterday, in fact, drew the weakest foreign demand since October of last year.
Benchmark 10-year note yields were marked 2 basis points higher from Monday levels at 4.292% immediately following the auction results, while while 2-year notes edged to 5.014%
Tuesday's auction also comes with the overhang of looming government shutdown, as funding for its operations technically comes to a halt on September 30 and lawmakers have yet to agree an extension amid a partisan battle over spending cuts.
Demand may also be tested by recent developments in Japan, where investors hold more U.S. Treasury bonds than in any other foreign market. New Bank of Japan Governor Kazuo Ueda, who recently widened the band on Japanese government bond yields (making them more attractive to domestic investors).
Ueda has also suggested he could abandon a policy of negative rates in the coming year, providing further impetus for Japanese buyers to dump Treasuries and buy domestic bonds.
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