U.S. Treasury bond yields moved higher Thursday following a weaker-than-expected auction of 7-year notes that saw demand slide below the recent auction average.
The Treasury sold $62 billion in 7-year notes at an auction-high yield of 1.3%, more than 10 basis point north of the previous auction in February. The extra yield, however, failed to attract a notable increase in demand, with the so-called bid-to-cover ratio coming in at 2.23, up from the 2009 low of 2.04 in February but down from the six auction average of 2.28 and one of the worst on record.
Foreign buyers took up around 57.3% of the notes on sale, Treasury data noted, up from the 38.1% recorded during the February auction.
Benchmark 10-year note yields jumped to 1.64% immediately following the auction results, before easing to 1.623%, while the interest-rate focused Nasdaq Composite index slipped into negative territory for the session.
Earlier this week, a $60 billion sale of 2-year notes drew a bid-to-cover ratio, a key gauge of investor demand, of 2.54, meaning the Treasury received interest for more than two-and-a-half times the amount offered for sale, up from 2.44 in February when the bonds were sold at a record low yield of 0.98%.
That sale, however, was followed by data published by IHS Markit which tracks economic activity in the world's biggest economy, showed that the services sector is running at its fastest pace since July 2014 this month.
Factory output, the data indicated, eased modestly from February, but input prices surged to the highest levels since 2011 amid the ongoing rise in energy and commodity prices.
Inflation is the so-called enemy of bonds because it erodes the value of future coupon and principal payments, making them less-attractive than assets which return cash to investors over a shorter time-frame.
Federal Reserve Chairman Jerome Powell insisted earlier this week that while the post-pandemic rebound will be solid, the lingering effects on the labor market will likely mean prices rises will be temporary, and that the economy will need record-low rates, and continued liquidity support, for at least another two years.
That said, Fed's tolerance for faster inflation -- which could accelerate to 2.2% this year as the base-effects from higher oil and commodity prices factor into CPI readings throughout the spring and summer months -- alongside red-hot growth triggered a predictable reaction from the bond market, with benchmark 10-year Treasury yields rising to a January 2020 high of 1.75% during last week's sell-off.