Market News

Short-term Treasury yields climbed Tuesday as weaker-than-expected demand at the two-year note auction underscored worries that President Donald Trump’s trade war is eroding investor confidence.

The rise stood in contrast to Europe, where yields pulled back amid concerns that U.S. tariffs will drag down the pace of global growth.

Two-year Treasury yields approached 3.82 per cent after the latest auction, up six basis points on the day, and held at that level as the trading day drew to a close in New York. Longer-dated Treasury yields declined, paring the sharp jump seen when the week started.

The Treasury market has been rocked by unusual volatility this month as Trump’s erratic trade policies and vocal criticism of Fed Chair Jerome Powell drive a pullback from what’s usually a go-to haven.

With the U.S. itself now a main source of financial volatility, investors have pushed into other refuges like gold, the Swiss currency and European bonds.

There’s an “ongoing retreat by cross-border real money investors” from U.S. bond markets, including the Treasury market, according to research by John Velis at BNY Markets. Outflows eased somewhat last week following one of the worst weeks for cross-border flows in several years the previous week, Velis said in a report.

The recent moves have made Treasury auctions a closely watched gauge of whether foreign demand is on the decline.

While the Treasury Department’s US$69 billion sale of new two-year notes produced the lowest yield since September, the 3.795 per cent result was 0.6 basis points higher than the trading level at the bidding deadline, a sign of weaker-than-expected demand.

Dealers were left holding 13.7 per cent of the auction, more than the average of 11.6 per cent for the previous six offerings of the tenor. Indirect bidders — the category that includes foreign central banks bidding through the Fed — took 56.2 per cent, their lowest share in two years. But direct bidders — typically large investors that circumvent dealers — won 30.1 per cent, among the highest shares on record in data since 2004.

There will be five- and seven-year note auctions on Wednesday and Thursday, respectively.

“The risks to Treasury auctions in the current environment have been adding the pressure on the front-end,” John Canavan, strategist at Oxford Economics, said in a note. “Bund yields are lower, outperforming Treasuries as market participants rethink safe-haven assets.”

Two-year Treasury yields remain well below this year’s peak level of 4.42 per cent reached in early January. Much of that reflects expectations that the Trump administration’s tariffs will hurt U.S. economic growth later in the year, leading the Fed to cut interest rates.

Derivatives markets are pricing in expectations that the Fed will start easing policy by July — with at least three quarter-point cuts anticipated by year end — even as central bank officials have spoken on the need to focus on tariff-driven inflation risks.

Minneapolis Fed President Neel Kashkari on Tuesday said the central bank’s job was to make sure tariffs don’t spur an ongoing inflation problem, echoing recent comments by Powell.

“We are seeing European investors repatriate some of their investments in the U.S.,” said Chris Zaccarelli, chief investment officer for Northlight Asset Management. “We expect that trend to continue as long as tariff policies and other anti-globalization policies are seriously discussed.”

What Bloomberg strategists say...

“Germany’s front-end bonds may see a mild correction after their recent feverish rally, but even so, they are poised to retain much of the recent gains after the European Central Bank’s remarkable dovish turn last week.”

— Ven Ram, Macro Strategist, Dubai.