Treasuries Fall After Auction Demand Drops to Lowest Since 2009

  • Benchmark yields climb for fourth day as Brexit concern wanes
  • Fed Chair Yellen concludes first day of testimony to Congress

Fed's Yellen Subtly Changes Job, Inflation Outlook

Treasuries declined for a fourth day, the longest streak since April, after a gauge of demand fell to the lowest since 2009 at a $34 billion auction of five-year notes.

Benchmark 10-year note yields climbed after registering the biggest increase in a month on Monday amid growing speculation the U.K. will vote to remain in the European Union. In testimony before the Senate Banking Committee, Federal Reserve Chair Janet Yellen said the central bank is watching for whether, rather than when, the U.S. economy would show clear signs of improvement.

In recent weeks, global bond-market sentiment has swung with polls on Britain’s referendum, and forecasts Tuesday were signaling an edge for the “Remain” campaign had shifted to mixed results. Ten-year Treasury yields touched the lowest in almost four years last week, before rebounding following a temporary suspension of both British campaigns after the murder of pro-“Remain” lawmaker Jo Cox. Yellen began two days of testimony to Senate and House lawmakers Tuesday, after saying June 15 that Brexit risks influenced the decision to hold off on raising interest rates earlier this month.

“Brexit fears are waning a bit," said Dan Mulholland, head of Treasury trading in New York at Credit Agricole SA. "Since the auction, the market’s been sagging a little. It was a weak auction."

‘Poor’ Auction

The yield on the 10-year note rose two basis points, or 0.02 percentage point, to 1.71 percent as of 5 p.m. in New York, after jumping eight basis points Monday, the biggest increase since May 18, according to Bloomberg Bond Trader Data. The price of the 1.625 percent security due in May 2026 was 99 1/4.

Tuesday’s five-year note auction was rated "poor" in a Bloomberg News survey of six of the 23 primary dealers obligated to bid at U.S. debt sales.

"It was a pretty poor auction -- I’m not really surprised,” said Charles Comiskey, head of Treasury trading in New York at Bank of Nova Scotia, a primary dealer. Investors are reducing exposure before this week’s Brexit vote, he said.

Brexit Risk

Fed Chair Yellen mentioned several potential threats to the economy from outside the U.S., including those from uncertainty over China’s expansion and from Thursday’s vote in the U.K.

“A U.K. vote to exit the European Union could have significant economic repercussions,” she said.

Britain’s referendum remained too close to call two days before the vote. A YouGov poll of 1,652 voters for the Times newspaper published late Monday showed “Leave” at 44 percent and 42 percent for “Remain.” Separately, a survey of 800 people by ORB for the Daily Telegraph had “Remain” at 53 percent and “Leave” at 46 percent among those certain to vote.

Futures indicate a 49 percent chance that the Fed will raise rates this year, down from a 76 percent probability at the start of the month.

Tuesday’s sale was the second of three fixed-rate note auctions this week totaling $88 billion. The Treasury will auction $28 billion of seven-year debt Wednesday.

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