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Treasury Auction Nudges 2-Year Note Yields To Top of Fed Target Rate

The Treasury sold $60 billion in 2-year notes at the outer edge of the Fed's target rate of 0% to 0.25%, potentially pressuring Chairman Jerome Powell's patience on inflation.

U.S. Treasury bond yields moved higher Tuesday following a weaker-than-expected auction of 2-year notes that saw demand slide amid the Federal Reserve's hawkish stance on rates and a series of faster than forecast inflation readings.

The Treasury sold $60 billion in 2-year notes at an auction-high yield of 0.249%, more than 10 basis point north of the previous auction in late May and just at the outer-edge of the Fed Funds target rate of between 0% and 0.25%. 

The extra yield, however, failed to attract a notable increase in demand, with the so-called bid-to-cover ratio coming in at 2.54, down from the 2.74 recorded on May 25. Indirect bidders, comprised mostly of foreign central bank buyers, took just 50.6% of the auction, down from 57.1% in the previous sale.

Benchmark 10-year Treasury note yields moved higher in the immediate moments following the 2-year sale to trade at 1.478%, while 2-year notes held at around 0.238%. 

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The sale comes just ahead of Fed Chair Jerome Powell's testimony before a Congressional finance committee this afternoon, during which he is expected to be grilled over the central bank's recent signaling on 2023 rate hikes, as well as the slowing of the pace of their $120 billion in monthly bond purchases. 

"We at the Fed will do everything we can to support the economy for as long as it takes to complete the recovery," Powell said in prepared remarks for his 2:00 PM Eastern time appearance, and repeated his view that inflation pressures, which have lifted headline CPI readings to the highest levels in more than a decade, will fade into the end of the year and again in early 2022.

Powell's comments, however, come amid one of the sharpest pullbacks in Treasury yields in more than a year last week, and the biggest gain in long bets -- as based on CFTC futures data -- in nearly four years as bond markets appear to accept the Fed's view that 'transitory' inflation pressures will ease over the second half of the year.

Inflation data itself, however, is moving in a singular direction: Core inflation, which strips out volatile prices in food and energy products, is rising at an annualized 8.3% clip over the past three months, the fastest since 1982. Headline inflation, in part powered by year-on-year comparisons in food and energy, is running at 5%, the fastest in more than 13 years.