By Gertrude Chavez-Dreyfuss
NEW YORK, Oct 7 (Reuters) - US Treasuries rose in afternoon trading on Wednesday, with yields backing away from their highs as oil prices fell and a strong $39 billion auction of 10-year notes reassured investors that demand for long-term government debt remained intact despite recent market volatility.
US government debt earlier came under renewed selling pressure, driving yields on the benchmark 10-year note and 30-year bond to fresh 24-year highs as oil prices jumped
above $100. That re-ignited worries that inflation may prove more stubborn than expected. Rising yields mean Treasury debt prices were higher.
A strong $39 billion sale of 10-year notes sparked buying across the Treasury market, analysts said. Some investors had feared weak demand given persistent bearish sentiment toward longer-dated Treasuries in recent months, driven in part by renewed concerns over rising fiscal deficits.
"It was a good auction given how much the 10-year has sold off, and it's good to see buyers step in," said Vinny Bleau, director of fixed income research at Raymond James in Memphis. "You can be afraid of it (the selloff), or you can take advantage of it."
The drop in oil prices also helped yields drift lower from their highs after the International Energy Agency agreed to speed up a release of oil stocks and prioritize diesel in a bid to curb record high fuel prices.
Brent crude fell 0.5% to $100.09 per barrel, while US crude slid 1.1% to $88.32 per barrel.
In afternoon trading, the benchmark 10-year yield was up 1.3 basis points (bps) to 5.284% after hitting a 24-year peak of 5.364% earlier. US 30-year yields also touched a 24-year high and were last 2.8 bps higher at 5.669%.
On the shorter end of the curve, US 2-year yields, which reflect interest rate expectations, were down 2.3 bps at 4.768%.
SPACEX FACTOR
US debt was also earlier undermined by reports that Elon Musk's SpaceX, a rockets-to-AI firm, was seeking $40 billion in financing to fund purchases of Nvidia chips. The Financial Times reported that SpaceX is looking to raise about $10 billion in bank loans and $30 billion in investment-grade debt for the chip order.
If SpaceX enters the investment-grade bond market, it could revive concerns that large-scale corporate borrowing is competing with long-dated US Treasuries for investor capital, analysts said.
"The amount of demand of private sector borrowing, particularly for long paper ... has grown so significantly that it has created this crowding-out effect or competition for capital," said Thomas Urano, co-chief investment officer at Sage Advisory in Austin.
The 10-year Treasury auction, meanwhile, went down smoothly, pricing at 5.3%, lower than the expected rate at the bid deadline, suggesting that investors did not need a premium to take down the benchmark debt.
The bid-to-cover ratio, a measure of demand, was 2.77, above the six-auction average of 2.54. Primary dealers were left with just 2.5% of the offering, their smallest share since the aftermath of the global financial crisis, suggesting investor demand was strong enough that dealers were not required to absorb much of the issue.
'CALMED THE NERVES'
"The strong stop through and high end-user demand may have calmed the nerves of some investors thinking that there would be no demand given the rise in yields," said Gennadiy Goldberg, head of US rates strategy at TD Securities. "On the contrary, we think higher yields are prompting investors to dip their toes even as they worry about recent volatility."
Minutes of the Federal Reserve's September meeting were also released on Wednesday, with policymakers divided over the rationale for raising interest rates.
"Some participants" saw a hike as needed to keep the impact of energy and other price shocks at bay, but a more hawkish core viewed it as necessary to guard against emerging demand-driven inflation, the minutes showed.
Elsewhere in the Treasury market, the yield curve steepened on Wednesday with the spread between two-year and 10-year yields widening to 52.2 bps from 48.1 bps. The curve hit 53.7 bps, its steepest level since mid-August after long-dated yields rose more sharply than shorter-dated ones, a move known as a bear steepener.
A bear steepener reflects a pickup in inflation expectations.
(Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Sophie Kiderlin in London; Editing by Dhara Ranasinghe, Will Dunham and Sanjeev Miglani)
