Yields stable after strong 10-year auction, ahead of CPI

(Recasts first paragraph, adds analyst quotes, updates rates)
By Kate Duguid
NEW YORK, Sept 12 (Reuters) - U.S. Treasury yields were
steady on Wednesday afternoon following strong demand at auction
for $23 billion in new supply of 10-year notes offsetting
expectations that Thursday morning's consumer price data release
will show swelling inflation.
The U.S. Treasury Department on Wednesday sold $23 billion
of 10-year government notes, with 22.64 percent of the supply
taken by primary dealers, the lowest since January. Primary
dealers are responsible for absorbing any supply not bought by
direct or indirect bidders.
Indirect bidders, which include fund managers and foreign
central banks, took 63.92 percent of the supply, higher than
61.27 percent in August and the average of 61.49 percent. Direct
bidders took 13.44 percent, higher than the 11.27 percent taken
in August and the auction average of 5.10 percent.
"We had a very, very good 10-year auction which is helping
keep a lid on yields," said Mary Ann Hurley, vice president,
fixed income trading at D.A. Davidson.
The offering was smaller than the $26 billion auctioned in
August, but larger than the average of $21 billion at this
maturity. New supply of Treasuries has surged in 2018 as the Fed
has reduced its bond buying and the Treasury has issued new debt
to pay for President Donald Trump's $1.5 trillion tax cut.
Treasury prices rallied modestly on Wednesday morning after
the Labor Department reported that the producer price index fell
unexpectedly last month, as declines in the prices of food and a
range of trade services offset the higher cost of energy
The market's response on Wednesday was muted, however,
because overall inflation is steadily rising, with expectations
that the record job opening numbers reported on Tuesday and
strong wage gains last week will be reflected in Thursday's
consumer price index data. The Fed, which is expected to raise
interest rates later this month for the third time in 2018, is
less concerned with the PPI report.
"I do caution on the PPI number, because the Fed really
cares about what the final buyer is paying. (PPI) weighs very
little in the Fed's decision," Hurley said.
On Wednesday afternoon the two-year yield, which
reflects market expectations of Fed interest rate hikes, hit a
fresh decade high for the fourth consecutive day, topping out at
2.7522 percent.
At 3:16 p.m. ET (19:16 p.m. GMT), the 10-year yield
was at 2.966 percent, down from Tuesday's close at
2.979 percent. The 30-year yield was last at 3.109
percent, below its last close at 3.124 percent.

September 12 Wednesday 3:23PM New York / 1923 GMT
US T BONDS DEC8 142-8/32 0-9/32
10YR TNotes DEC8 119-104/256 0-20/256
Price Current Net
Yield % Change
Three-month bills 2.11 2.1508 -0.002
Six-month bills 2.26 2.3179 -0.005
Two-year note 99-196/256 2.7481 -0.004
Three-year note 99-204/256 2.8212 -0.005
Five-year note 99-122/256 2.8637 -0.005
Seven-year note 98-228/256 2.9271 -0.010
10-year note 99-56/256 2.9663 -0.013
30-year bond 97-232/256 3.1079 -0.016

Last (bps) Net
U.S. 2-year dollar swap 17.50 -1.00
U.S. 3-year dollar swap 15.25 -1.25
U.S. 5-year dollar swap 12.75 -0.25
U.S. 10-year dollar swap 6.50 -0.25
U.S. 30-year dollar swap -6.75 -0.50

(Reporting by Kate Duguid; Editing by Bernadette Baum and Will

First Published: 2018-09-12 16:44:20
Updated 2018-09-12 21:34:55

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