US Treasury prices advanced, driven by a sell-off in US equities that spurred demand for safe-haven assets and a decline in oil prices that prompted markets to pare back bets on Federal Reserve interest rate hikes over the next year.
A global sell-off in semiconductor stocks intensified concerns that the earlier rally in AI-related shares had become overextended, thereby boosting demand for safe-haven assets like government bonds and the US dollar. The strong demand was evident in a robust two-year Treasury note auction.
The drop in oil prices also alleviated some pressure on the Federal Reserve to combat inflation through higher interest rates. Swaps contracts indicated a slight reduction in the market-implied probability of more than one rate hike over the next year, with pricing now reflecting expectations for cumulative rate increases of approximately 45 basis points by mid-2027.
"The market has already priced in a more hawkish Fed policy outlook," said Izaac Brook, an interest rate strategist at RBC Capital Markets, noting that the inflation-adjusted yield on two-year Treasuries has climbed to its highest level since the Fed began cutting rates in September 2024.
The rise in Treasury prices pushed yields down by 1 to 4 basis points, with the steepest declines seen in short-term yields, which are most sensitive to changes in Fed policy. The yield on the two-year note fell more than 4 basis points to 4.19%.
The results from the monthly two-year Treasury auction held at 1 p.m. New York time showed a stop-out yield below expectations, reflecting solid demand. However, the awarded yield of 4.189% still marked the highest level for a two-year note sale since January 2025. Just prior to this auction, on June 17, new Fed Chair Kevin Warsh held his first press conference, leading traders to price in the potential for Fed rate hikes in response to rising inflation, which had caused a sharp spike in two-year yields.
"Given the market has priced in nearly 50 basis points of rate hikes over the next year, investors may see value in two-year notes at these yield levels," said Angelo Manolatos, an interest rate strategist at Wells Fargo. "The market stabilizing today likely also played a positive role for the auction results."
This $69 billion two-year Treasury auction was the first of three fixed-rate government debt sales this week, with five-year and seven-year note auctions scheduled over the next two days.
Additionally, despite the fall in oil prices, yields on five-year and ten-year US Treasuries touched their highest levels in at least a week on Monday. Traders suggested this movement could be related to hedging activity associated with a large bond issuance by SpaceX.
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