(Bloomberg) -- Treasury yields rose Wednesday as investors faced an onslaught of new bond supply from an auction of five-year notes and a corporate-bond offering by Oracle Corp.
Five-year notes were the worst performer among Treasury benchmarks, with yields rising by more than 5 basis points, though all rose by at least 4 basis points. The $70 billion auction — the largest of the US government's monthly note and bond sales — still drew the lowest yield since April 2023. Oracle sold $6.25 billion of bonds in the day's largest corporate issue, a four-part sale with 30- and 40-year segments.
The near-term supply — including a seven-year Treasury note auction Thursday — follows a drop in Treasury yields back toward their lowest levels of the year. New two-year notes sold Tuesday, for example, began the session with yields near 3.50%, the lowest since September 2022, relative to the Federal Reserve's new 4.75%-5% target for the US overnight rate.
"The market is faced with absorbing a massive amount of supply in the belly" over the next day "with little concession following the post-FOMC selloff, which triggered significant buying," said Daniel Mulholland, senior managing director at Crews & Associates, referring to the Federal Open Market Committee. Yields rebounded last week after Fed policymakers cut rates by a half-point, twice as much as many observers expected.
Awaiting Data
Investors may be reticent to buy at lower yield levels before they see fresh economic data, suggesting that additional Fed rate cuts are anticipated to happen as quickly as traders currently are pricing in. Swap contracts for predicting future Fed moves on Tuesday fully priced in both a half-point and a quarter-point move over this year's two remaining policy meetings — and 50% odds it will come at the next one in November.
A massive apparent sale of futures on the Secured Overnight Financial Rate, another mechanism for wagers on the course of Fed policy, via a block trade Wednesday contributed to higher short-maturity yields. This is consistent with the view that December contracts were pricing in too much in the way of rate cuts. The 118,000-contract block trade was the largest on record for SOFR futures, which debuted in 2018.
"We have a little less conviction on Treasuries given the strong rally we have seen, and are better sellers than buyers at the moment," said Jack McIntyre, portfolio manager at Brandywine Global Investment Management.
"I don't think the economy needs another 50-basis-point rate cut unless we get a weak payroll number" in one of the next two monthly employment reports for September and October, ahead of the next Fed policy decision on Nov. 7, he said.
--With assistance from Edward Bolingbroke.
(Adds Oracle bond offering size in second paragraph, updates yield levels.)
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