U.S. government bonds weakened Thursday as the government sold $11 billion of inflation-indexed debt, helping to send yields to fresh multiyear highs.
The yield on the benchmark Treasury 10-year note climbed for the fourth consecutive session, rising to 3.109%--its highest closing level since July 2011—from 3.093% Wednesday. Yields rise as bond prices fall. The yield on the 30-year Treasury bond reached its highest closing mark since June 2015, settling at 3.245% from 3.214% Wednesday.
Analysts said the government’s auction of $11 billion of 10-year Treasury inflation-protected notes, known as TIPS, Thursday afternoon attracted weaker demand than expected, even as inflation expectations hover near their highest level since 2014.
The break-even rate of inflation, which measures the gap in yields between conventional government debt and TIPS of similar maturities, has risen this year as the economy has continued its solid growth. Investors are forecasting a 2.19% average annual rate of inflation for the next 10 years, up from 2% at the start of the year.
Bond yields have risen this year, lifted in part by signs of a pickup in inflation, which hurts the value of outstanding bonds by eroding the purchasing power of their fixed payments. Widening deficits, propelled by tax cuts and increased government spending, have also increased the supply of bonds, leading investors to expect yields should rise.
Some investors and analysts said the recent yield gains were surprising, given a host of geopolitical concerns lingering world-wide. Those include upcoming nuclear talks between the U.S. and North Korea, the pending deadline for revising the North American Free Trade Agreement and the efforts by antiestablishment political parties in Italy to form a coalition government.
Investors typically respond to geopolitical turmoil by increasing their purchases of Treasurys, which are seen a safe asset.
Several analysts said demand for Treasurys remained weak even though U.S. yields are higher than those for any other developed market economy. The gap between U.S. and German government bond yields recently hit its widest since 1989.
The array of concerns should be “positive for bonds, and that’s not happening,” said Andrew Brenner, head of global fixed-income at NatAlliance Securities. The absence of demand for Treasurys with their relatively high yields could suggest rising concerns that the U.S. is entering a bear market for bonds, he said. “Given that, I just think we’re in for more pain.”