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Bond market braces for Treasury yield surge following record auctions

Government bond yields could surge to their highest levels since January 2020 as Treasury begins to this week to auction off a record amount of supply.

"Given the economic backdrop, I think these auctions are going to prove more market-moving than usual," Antoine Bouvet, a senior rates strategist with ING, said in an interview.

Bouvet said the planned Treasury auctions, which begin April 12, will likely push the yield on the benchmark 10-year bond to close at or above 1.75% this week, up from its recent trough of 0.52% on Aug. 4 and potentially its highest close since Jan. 22, 2020. In an April 9 note, David Kostin, chief U.S. equity strategist at Goldman Sachs, said he expects the 10-year yield to climb to 1.8% in the first quarter of 2021, climbing to 1.9% later in the year.

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The 10-year yield was trading just above 1.67% early April 12, essentially flat from the April 9 close.

In April, Treasury plans to auction off a record $373 billion in securities, including $58 billion in 3-year notes, $38 billion in 10-year bonds and $24 billion in 30-year bonds this week alone, according to estimates from TD Securities. The record will be short-lived as $395 billion worth of securities will be auctioned in May, according to TD Securities estimates.

Treasury sells off securities, such as notes and bonds, in order to finance public debt. With a dramatic rise in government spending in response to the coronavirus pandemic, these auctions have increased in size as well.

"The enormous amount of supply of bonds will definitely test the limits of demand," said Tom Essaye, a trader and founder of financial research firm The Sevens Report, in an interview. "And that's one of the forces pushing yields higher — there are so many bonds that need to be sold in the coming years. Bottom line the enormous amount of supply is one of the factors that has markets nervous about a potentially disorderly rise in yields."

In February, yields skyrocketed after an auction of 7-year notes garnered tepid demand.

"Given what happened in February … markets are understandably a little bit nervous that we get some poor take up in these auctions [this week] that could trigger some renewed selling in U.S. treasuries and lifting yields further from where we are," said Derek Halpenny, head of research for global markets EMEA and international securities at MUFG.

Halpenny said that in addition to the auctions, the Consumer Price Index for March will be released April 13 with expectations that the latest inflation data may cause a further increase in bond yields.