U.S. Treasury bond yields were mixed following a key government bond auction that could provide the first major test to Federal Reserve Chairman Jerome Powell's newly hawkish rate stance.
The Treasury sold $45 billion in new 2-year notes as part of its new quarterly refunding program that includes bigger auction sizes as it looks to raise around $103 billion from coupon-bearing bond sales over the coming three months.
Investors placed bids worth more than 108 billion for the $45 in notes put up for auction, providing a so-called 'bid-to-cover' ratio, a key indicator of demand, of 2.94.
That was the best reading since January and firmly ahead of the 2.78 bid-to-cover ratio recorded at the previous auction in July and suggests investors aren't overly concerned that the Fed will continue to raise interest rates in the coming months.
Benchmark 2-year notes were trading at 5.048% in the wake of the auction, which drew a high yield of 5.024%, with 10-year notes last seen pegged at 4.208% in mid-day New York dealing.
The CME Group's FedWatch tool, a real-time tracker of Fed rate projections, suggests an 80.5% chance that rates will remain unchanged at the central bank's next policy meeting in September, with bets on a November rate hike pegged at 49%.
The sale comes just one trading day after Fed Chair Powell surprised markets on Friday with hawkish signaling on interest rates during his keynote address to the central bank's Jackson Hole symposium, suggesting the need for at least one more increase between now and the end of the year, and possibly two, in order to bring inflation back closer to the Fed's 2% target.
The comments added some 10 basis points to short-term Treasury note yields and caught bond traders -- who had place the highest short bets on Treasury bond futures since 1990 going into Powell's speech, according to CFTC data -- largely by surprise.
The auction, also comes shortly on the heels of the Fitch Ratings decision to lower its triple-A credit grade on U.S. debt, which triggered a volatile market reaction last week and, alongside some stronger U.S. economic data, pushed 10-year yields to a 17-year high of 4.366% early last week.
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