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Treasury Yields Jump After Weak $43 Billion 2-Year Auction, Sliding Foreign Demand

The Treasury sold $43 billion in 2-year notes at a high yield of 4.29% - nearly a full percentage point above last month's auction levels.

Treasury bond yields moved higher again Monday following a weaker-than-expected auction of 2-year notes that fading demand from overseas investors and a massive jump in borrowing costs for the U.S. government. 

The Treasury sold $43 billion in 2-year notes at an auction-high yield of 4.29%, up nearly a full percentage pint from the the previous auction in late August and another full point ahead of the current Fed Funds target rate of between 3% and 2.25%. 

Investors bid $2.51 for every $1 of 10-year notes on offer from the Treasury, auction data indicated, a modestly firmer tally than the 2.51 'bid-to-cover' ratio recorded at the last auction on August 23, when the yield was just 3.307%.

Prices and yields in the bond market move in opposite directions, making today's paper much cheaper than it was in early August.

Foreign buyers, the data indicated, took down around 53% of the sale, down from the 66.1% figure reported in August, suggesting overseas buyers are seeing attractive yields in other markets as central banks around the world signal further near-term rate hikes. 

Direct bidders, which represent domestic demand, took up the slack, taking down 100% of their sale allotment, a tally that could indicate that institutional fund mangers are taking cash from stock markets, where the dividend yield on the S&P 500 is a mere 1.7%, and putting it to work in Treasury bonds.

Stocks extended declines in the wake of the auction results, with the Dow Jones Industrial Average marked 371 points lower on the session and the S&P 500 falling 41 points.

Benchmark 10-year notes rose 4 basis points to 3.896% in the wake of the auction, while 2-year notes were pegged at 4.338%.

U.S. Treasury bond yields, in fact, have risen more than 110 basis points since August 1, Bank of America noted in its weekly 'Flow Show' report Friday, helping put global bond markets on pace for their biggest annual declines in more than seven decades.

What BofA calls a 'bond crash' could "threaten credit events and liquidation of world's most crowded trades: long U.S. dollar, long U.S. tech and long private equity."

"True capitulation is when investors sell what they love & own," BofA said.

Fixed income traders are also betting on another 75 basis point rate hike from Fed in November, according to the CME Group's FedWatch, while the Atlanta Fed's GDPNow forecasting tool suggests third quarter growth has slowed to just 0.3%.