Bond Report: Treasury yields surge after Japan bond auction sees tepid demand

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U.S. Treasury yields rose on Tuesday as a lackluster sale for Japanese government debt sent the country’s bond yields sharply higher, raising U.S. and European debt yields also.

How are global bond-markets trading?

The 10-year Treasury note yield TMUBMUSD10Y, +3.69%   climbed 5.9 basis points to 1.732%, while the 2-year note rate TMUBMUSD02Y, +2.49%   was up 4 basis points to 1.662%. The 30-year bond yield TMUBMUSD30Y, +3.09%   surged 5.9 basis points to 2.179%.

The 10-year yield for the Japanese government bond TMBMKJP-10Y, +32.29%, or JGB, was up 6 basis points to negative 0.15%. The 10-year German bond yield TMBMKDE-10Y, +7.99%   picked up around 5. basis points to negative 0.52%.

What’s driving Treasurys?

Global bond markets reeled in the wake of an auction for Japanese government bonds. The sale saw its biggest “tail” for a 10-year note since 2015, a sign that the auction struggled to draw interest from market participants. The tail is the amount by which the highest yield the Treasury sold in the auction exceeds the highest yield expected when the auction began

This comes after the Bank of Japan indicated on Monday it could curb its bond-buying this month for large swathes of its government debt market.

In other central bank news, the Reserve Bank of Australia cut rates by a quarter point on Tuesday, bringing its benchmark cash rate down to a record low of 0.75%.

See: Developed central banks expected to see biggest ‘synchronised easing’ since 2000

In economic data, the U.S. Institute for Supply Management’s (ISM) purchasing managers index for the manufacturing sector in September will be published at 10 a.m. Eastern. Economists polled by MarketWatch anticipate a reading of 50.2%. The factory gauge was last seen at 49.1% in August, putting it officially into contraction territory.

The decline of U.S. manufacturing activity growth has been one of the clearest manifestations of how a global trade slowdown has weighed on economic growth. Still, spending by households and a resilient services sector has kept the impact of the U.S.-China trade war contained, so far.

What did market participants’ say?

Debt “markets are under pressure this morning, stemming from what appears to be an extremely weak bond-auction in Japan,” wrote Ian Pollick, head of North American rates strategy at CIBC.

“This has leaked into [long-term North American bonds], as many recall that the original taper tantrum in 2014 actually began with a material rise in JGB yields,” said Pollick.