By Gertrude Chavez-Dreyfuss
NEW YORK, Oct 8 (Reuters) - US Treasuries rose on Thursday, with most yields across the curve falling for just the second time this week, after a 30-year bond auction met with solid demand, showing investors remain willing to buy long-dated government debt, despite the ongoing market selloff.
Earlier in the session, Treasuries were pressured by higher oil prices. Crude oil pulled back slightly after President Donald Trump said that the US will not launch an attack on Iran
before midterm elections in November.
In afternoon trading, the benchmark 10-year yield was down 5 basis points to 5.227% after hitting a 24-year high on Wednesday. US 30-year yields also declined, down 5.9 bps at 5.602% . When Treasury prices fall, yields rise.
On the shorter end of the curve, US 2-year yields, which reflect interest rate expectations, dipped 1.3 bps to 4.751%.
Analysts said the strong 30-year auction was a big factor for the rally. The issue priced at a yield of 5.618%, below the expected rate at the bid deadline, which meant investors bought the bond without demanding higher compensation.
The bid-to-cover ratio, a measure of demand, was also high at 2.54, better than the average of 2.41 times over the last six auctions. Indirect bids, which include foreign investors, took 72.3% of supply, up from an average of 69.1% over the last six auctions.
Jay Hatfield, chief executive officer at Infrastructure Capital Management, said he thinks 10-year Treasury yields have peaked.
"The peak was probably the 5.30% level, maybe even lower and we believe we have already seen peak pessimism about Fed rate increases," Hatfield said. He believes the Fed will only be able to raise interest rates just once in this cycle, as opposed to the three currently being factored in by the market.
"We think the Fed's being irrational by all this tough talk on inflation," Hatfield said.
Fed Governor Christopher Waller said on Thursday additional rate hikes will likely be needed to lower inflation to the Fed's 2% target, but added there was "flexibility" about the pace of increases. His comments pushed 2-year yields higher, which rose faster than 10-year yields.
The yield curve flattened on Thursday, with the spread between 2-year and 10-year yields narrowing to 47.1 bps from 51.4 bps. Earlier in the session, the curve hit 54.2 bps, steepest since mid-August.
OIL AS MAJOR DRIVER
Oil remains a major driver of Treasury yields, stoking inflation concerns.
Brent crude settled at $103.92 per barrel, up 3.7%, while US crude futures ended 3.4% higher at $91.17. Both contracts at one point were up $5 a barrel on persistent worries about oil supply in the Middle East.
"The market remains content to trade the energy shock solely from the perspective of the inflationary implications, largely ignoring any potential demand destruction that could follow," wrote Ian Lyngen, head of US rates strategy at BMO, in a research note.
(Reporting by Gertrude Chavez-Dreyfuss, editing by Deepa Babington)
