Short to medium-term U.S. Treasury notes faced pressure during the trading session, with oil prices extending their weekly gains as traders closely monitored developments in the Strait of Hormuz. The yield on the newly auctioned 7-year Treasury note came in approximately 0.5 basis points higher than pre-auction trading levels, pushing mid-term yields toward their daily peaks later in the afternoon.
Short-term Treasury yields climbed by as much as 4 basis points shortly after 3 p.m. New York time, while long-term yields remained largely unchanged. The yield spread between the 2-year and 10-year notes narrowed to around 51 basis points, reversing Monday's steepening trend. The 10-year Treasury yield hovered near 4.35%, rising about 1 basis point during the session, while European bonds underperformed during London trading hours.
The decline in short-term bonds coincided with a hawkish shift in market expectations for Federal Reserve policy. OIS contracts now price in approximately 5 basis points of rate cuts by year-end, down from 8 basis points at Monday's close. Meanwhile, swap markets have eliminated expectations for a full 25-basis-point rate cut next year.
The 7-year Treasury auction concluded with a yield about 0.5 basis points above pre-auction levels, maintaining downward pressure on medium-term notes following the sale. However, auction metrics showed solid demand, with primary dealers receiving 11.6% of the allocation, lower than the previous auction. Direct bidders increased their takings to 30%, while indirect bidders saw their allocation decrease to 58.4%.
In Treasury futures markets, large block sales of 2-year and 5-year contracts during early trading exacerbated the downward momentum.
As of 3:46 p.m. New York time: - 2-year Treasury yield stood at 3.8401% - 5-year Treasury yield reached 3.9811% - 10-year Treasury yield was at 4.3515% - 30-year Treasury yield stood at 4.9409% - The yield spread between 5-year and 30-year notes was 95.81 basis points - The yield spread between 2-year and 10-year notes was 50.94 basis points