US sells 2-year Treasury notes at highest yield since 2008

• U.S. Treasury Department sells $26 billion of , fixed-rate government notes at highest yield at a two-year auction since September 2008, Treasury data showed.
• U.S. expected to increase auction sizes in 2018.
• Trading conditions thin after Christmas holiday.

A trader monitors trades in the Standard & Poor's 500 stock index options pit at the Chicago Board Options Exchange (CBOE) following news that the Federal Reserve, citing global economic concerns, chose to leave interest rates unchanged on September 17, 2015, in Chicago.

Getty Images

Two-year U.S. Treasury yields rose to nine-year highs on Tuesday as investors focused on new supply that will be sold into light trading conditions this week, and on large increases in issuance expected in 2018.

The U.S. Treasury Department sold $26 billion of , fixed-rate government notes at a yield of 1.922 percent, the highest yield at a two-year auction since September 2008, Treasury data showed.

The ratio of bids to the amount of two-year Treasurys offered was 2.52, the lowest reading in a year. This gauge of overall auction demand was 2.73 at the previous two-year note sale in November.

It's the first sale of $88 billion in new short- and intermediate-dated coupon supply this week. It will be sold into relatively illiquid conditions with many traders and investors away after Monday's Christmas holiday.

At the same time, investors are preparing for the U.S. government to increase auction sizes next year for the first time since 2008 to make up for declining purchases by the Federal Reserve.

Treasurys

"The short-end has been too low for most of this month in terms of yield," said Jim Vogel, an interest rate strategist at FTN Financial in Memphis, Tennessee. "We think that's going to take another move up once January gets here and people start concentrating on additional Treasury supply."

The Treasury is expected to initially concentrate increases in supply in short- and intermediate-dated notes.

Two-year Treasury yields rose as high as 1.916 percent on Tuesday, the highest since Oct. 14, 2008. Five-year note yields rose as high as 2.263 percent, the highest since April 12, 2011.

The Treasury Department will sell $34 billion in five-year notes on Wednesday and $28 billion in seven-year notes on Thursday.

It will further auction $13 billion in two-year floating-rate notes on Wednesday. Short- and intermediate-dated debt is also highly sensitive to interest rate hikes, which can send their yields higher. The Fed has indicated that an additional three increases are likely next year, though interest rate futures traders are pricing in only two.