By Karen Brettell and Sinéad Carew
Sept 9 (Reuters) - Benchmark 10-year Treasury yields reached their highest levels since 2023 on Wednesday after the announcement of an enlarged Treasury buyback of longer-dated bonds disappointed some investors who had wanted more.
Yields retreated from their highs, however, after the Treasury saw very strong demand for a $39 billion sale of 10-year notes.
The U.S. Treasury Department said it will buy up to $6 billion in 10- to 20-year Treasury bonds during its buyback
operation on Thursday, triple the size of its last long-dated operation.
"People thought the buyback was going to be larger than $6 billion. It was a disappointment so bond prices sank and yields rose," said Tom di Galoma, managing director at Mischler Financial.
After a selloff that pushed 30-year yields to their highest level since 2007, Treasury Secretary Scott Bessent announced in August that the government would increase buybacks of longer-dated bonds.
Very strong demand for a 10-year note auction then brought yields off this highs, with the debt selling at the highest yield since 2007.
"The auction came at a historical high for 2026 and buyers showed up with very strong demand. The reason they showed up in a very large way is because tomorrow the Treasury is going to buy 10-year to 20-year paper. Investors may have thought it was a risk-free trade," di Galoma said.
Treasury Department sold the 10-year notes at a high yield of 4.834%, more than a basis point below where they traded ahead of the auction. Demand was 2.71 times the amount of debt on offer, the highest since 2019.
The U.S. government already saw solid demand for its $58 billion sale of 3-year notes on Tuesday and will also sell $22 billion in 30-year bonds on Thursday.
The yield on benchmark U.S. 10-year notes was last up 3.06 basis points at 4.835% after earlier reaching 4.8568%, the highest level since November 2023.
The 30-year bond yield rose 2.06 basis points to 5.2846% after touching its highest level since August 18. The 2-year note yield, which typically moves in step with interest rate expectations for the Federal Reserve, rose 2.52 basis points to 4.423%, after earlier trading at 4.4316%, its highest level since July 2024.
A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at a positive 41.0 basis points.
Meanwhile, oil prices breached $100 for the first time since July as the intensifying conflict in the Middle East heightened concerns about supply. The move came as investors waited for inflation data, which analysts say will be key to the Federal Reserve's interest rate decision next week.
"The inflationary story is getting a little stickier, and that could cause the Fed to hike rates," said Lawrence Gillum, chief fixed income strategist for LPL Financial in Fort Mill, South Carolina.
FED POLICYMAKERS MEET NEXT WEEK
U.S. producer price and consumer price inflation reports are due to be released on Thursday and Friday, respectively. And analysts said the data will play a key role in whether the Fed hikes rates at its September 15-16 meeting.
Rising oil prices have reignited concerns that higher fuel costs will flow through to consumer inflation and add to inflation that is already running above the U.S. central bank's 2% annual target.
Traders raised bets on a rate hike at the Fed's meeting next week after the Labor Department reported on Friday that employers added far more positions than expected in August.
Fed funds futures traders are now pricing in about 60% odds of a rate hike next week.
(Reporting by Karen Brettell and Sinéad Carew; Editing by Paul Simao and Nick Zieminski)
