U.S. Treasury prices fell on Thursday, following three consecutive U.S. government debt auctions that saw weak demand. The poor results highlight investor fatigue with market volatility stemming from the collapse of diplomatic efforts aimed at ending U.S. military involvement in Iran. The selloff in the $31 trillion U.S. Treasury market accelerated after a poorly received 7-year note auction on Thursday. In late New York trading, the yield on the benchmark 10-year U.S. Treasury note rose by 7.95 basis points to 4.4117%, after moving between 4.3361% and 4.4256% during the session. The two-year Treasury yield increased by 10.05 basis points to 3.9858%, with its daily range between 3.8914% and 3.9981%. This week's auctions for 2-year, 5-year, and 7-year U.S. Treasury notes all concluded with awarded yields higher than prevailing market rates at the time the auctions closed. This marked the first occurrence since May 2024 and the worst performance for three auctions within a single month. In May 2024, traders were also scaling back their bets on interest rate cuts by the Federal Reserve. An industry insider commented, "We are experiencing sharp intraday swings at unexpected times due to various news headlines. This makes people reluctant to take on additional risk. In such an environment, it becomes more difficult to smoothly absorb large liquidity events like auctions." This week, the U.S. government completed its monthly issuance plan by selling a total of $183 billion in fixed-rate bonds. The 7-year note sale resulted in a high yield of 4.255%, above the 4.247% yield for similar maturity bonds at the auction deadline. Demand was even weaker for the 2-year and 5-year notes auctioned earlier in the week. The tepid demand coincides with uncertainty surrounding the duration of the Middle East conflict and its economic impact, which is driving energy prices higher and forcing traders to reassess their expectations for the Federal Reserve's policy path. Since the U.S. initiated military actions on February 28th, disrupting supplies from the Middle East, U.S. Treasury yields have largely moved in tandem with oil prices. Due to the prospect of rising inflation, traders have abandoned bets on Fed rate cuts this year and have even begun pricing in the possibility of rate hikes, adding further pressure on U.S. government debt. The U.S. benchmark crude price settled near $100 per barrel last week. It fell on Monday following claims of progress in ending the war, but rose by as much as 5.5% to around $95 on Thursday after threats of escalated attacks. Subsequently, a deadline for Iran to reopen the Strait of Hormuz was extended to April 6th, with statements indicating that negotiations were "progressing very well." Earlier this week, global bond markets had rallied on the possibility of diplomatic easing between the U.S. and Iran. However, as the agreement was rejected and threats escalated again, markets reversed their gains and turned lower. Interest rate strategists at Morgan Stanley noted this week that the market volatility has also increased trading costs, particularly for shorter-dated bonds. This may also be a contributing factor to the weak auction performance this week.
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