High U.S. Treasury yields begin to attract buyers; $39 billion 10-year note auction sees strong demand; long-end yields give back gains.

U.S. Treasury yields diverged on Wednesday after a $39 billion 10-year note auction drew strong demand, suggesting some large investors are beginning to re-enter the market as yields climb to multi-decade highs. Long-end Treasury yields gave back part of their intraday gains following the auction results. The Treasury's $39 billion 10-year note auction cleared at a high yield of 5.3%, noticeably below the secondary-market yield level before the auction, indicating robust investor demand. The bid-to-cover ratio rose to 2.77 times, the highest since 2016; the share allocated to non-dealer investors reached a record 97.5%. Monty Gandhi, rates strategist at Sumitomo Mitsui Banking Corporation (SMBC), said the auction showed that large, deep-pocketed investors are finally starting to view current yield levels as attractive. He noted that some large investors had already begun unwinding short Treasury positions when yields approached 5%, and may now be gradually buying back in. After the auction, the 10-year Treasury yield fell back to around 5.28%, down sharply from the 5.36% touched intraday. The 5.36% level had not been seen since 2002. The 30-year Treasury yield rose just about 1 basis point to 5.67%, after having climbed further earlier on rising oil prices. The short end of the curve outperformed, with the 2-year yield falling about 3 basis points to 4.76%. Global bond markets have been under sustained pressure in recent weeks. Elevated energy prices have intensified concerns about a resurgence in inflation and further central bank rate hikes, while companies raising large amounts of capital for AI infrastructure buildouts are also competing with governments for capital. On Wednesday, Brent crude briefly topped $102 a barrel after Iran again attacked ships in the Strait of Hormuz. Evelyne Gomez-Liechti, multi-asset strategist at Mizuho International, said the bond market is currently caught between two forces: on one hand, absolute U.S. Treasury yields have reached quite attractive levels; on the other, inflation risks from rising oil prices have yet to fade. U.S. Treasury Secretary Bessent said again at a White House event on Wednesday that the recent rise in bond yields is a "global phenomenon." He argued that, unlike other countries, the rise in U.S. yields mainly reflects higher real rates rather than worsening inflation expectations, driven in important part by still-strong U.S. economic growth. Bessent also reiterated that once the Iran conflict eases, energy prices are expected to fall, and market rates across maturities should then decline as well. Even so, the 10-year Treasury auction showed that current high yields have begun to attract money into the market. The market will next focus on Thursday's $22 billion 30-year Treasury auction, whose yield could reach the highest level since 2000. After the 30-year auction, the Treasury will also conduct a bond buyback, planning to purchase up to $6 billion of Treasuries with remaining maturities of 20 to 30 years. This will be the fourth such operation since the Treasury expanded its buyback program as long-term yields rose to multi-year highs. Meanwhile, the short end of the Treasury yield curve has recently shown some signs of stabilization. Weaker-than-expected inflation and labor market data last week, combined with relatively dovish policy signals from several central bank officials, led the market to lower its expectations for further Federal Reserve rate hikes. The minutes of the Fed's September meeting showed that all 19 officials supported the rate hike that month, with many deeming it necessary to raise rates to prevent inflation pressures from intensifying further. However, interest rate swap markets currently price about a 25% probability of a Fed hike this month, while another hike by year-end is fully priced in. John Briggs, head of U.S. rates strategy at Natixis, said some signs of stabilization have emerged over the past week, especially at the short end of the curve, and now the long end is beginning to show investor demand as well. While it is still too early to say the Treasury selloff is over, the strong 10-year auction at least sends a positive signal.