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10-year Treasury yield tops 3%, 2-year hits 2008 high after Iran deal exit

Key Points
  • Markets have been on edge since President Trump announced on Tuesday that the U.S. would be walking away from the Iran nuclear deal.
  • The Treasury Department auctioned $25 billion in 10-year notes at a high yield of 2.995 percent. The bid-to-cover ratio, an indicator of demand, was 2.56.
  • The Labor Department said producer prices edged up just 0.1 percent in April — the smallest increase since December — capped by a slump in food costs.

U.S. government debt yields traded around multiyear highs Wednesday after President Donald Trump announced that the United States would pull out of the Iran nuclear deal and the latest Treasury auction drew muted demand from Wall Street.

The yield on the two-year Treasury note hit 2.53 percent, its highest level since Sept. 8, 2008, while the yield on the 10-year Treasury note was higher at 3 percent, a key psychological level the benchmark for the first time since late April.

The yield on the 30-year Treasury bond rose to 3.152 percent. Bond yields move inversely to prices.

Markets have been on edge since President Trump announced on Tuesday that the U.S. would be walking away from the Iran nuclear deal and that sanctions on the Middle Eastern country would be reinstated.

While some countries in the Middle East commended the move, U.S. allies in Europe did not. President Hassan Rouhani of Iran said that his country would continue to commit to the nuclear deal, despite Trump's decision to withdraw, according to Reuters.

Oil prices rallied on the back of the news, with U.S. crude and Brent rising more than 2.5 percent on Wednesday, prior to the opening bell on Wall Street.

U.S. Markets Overview: Treasurys chart

Ballooning bond supply also continues to play a major role in fixed income markets.

The Treasury Department auctioned $25 billion in 10-year notes at a high yield of 2.995 percent, the highest yield at auction since 2014. The bid-to-cover ratio, an indicator of demand, held at a relatively decent 2.56. Indirect bidders, which include major central banks, were awarded 63 percent. Direct bidders, which includes domestic money managers, bought 8.3 percent.

Its auction of $31 billion in three-year notes Tuesday, saw relatively weak demand.

The three-year auction produced a high yield of 2.664 percent and a bid-to-cover ratio of 2.76. It will also sell $17 billion in 30-year bonds Thursday.

The Treasury Department has been under increased pressure to fund the federal government's yawning budget deficit, opting to increase the size of its debt auctions and buoying rates as a result. Some investors fret that the gradually increasing supply of debt could keep rates higher if Wall Street continues to favor other asset classes.

"If anything, I think certainly auction pressures are playing into the 10-year move, but from the Iran perspective, there's potentially an impact on oil prices and inflation pressures," said Craig Bishop, vice president of U.S. fixed income at RBC Wealth Management.

And while the historically large auctions do give Bishop concern, the strategist explained he isn't panicking just yet.

"Supply will be an issue for the markets, but at this point, I don't think it's something to be overly concerned about," he said.

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Key inflation data will also hold Wall Street's eye over the next two days.

The Labor Department said producer prices edged up just 0.1 percent in April — the smallest increase since December — capped by a slump in food costs. The department said that the read on the producer price index, which measures inflation pressures before they reach consumers, followed a 0.3 percent rise in March.

Core prices, which exclude volatile energy and food, matched expectations of a 0.2 percent increase in April. Over the past 12 months, wholesale prices are up 2.6 percent while core wholesale prices have risen 2.3 percent, according to Reuters.

The department will announce consumer pricing data Thursday; economists surveyed by Reuters expect that the core consumer price index rose 0.2 percent in April from the previous month.

Rising inflation is a threat to Treasury prices because it erodes the purchasing power of their fixed payments, putting upward pressure on rates.

"The rally [in yields] is definitely abetted by rising oil prices in the aftermath of the U.S. administration's decision to reinstate U.S. sanctions on Iran. But perhaps some bond selling ahead of the U.S. CPI report (tomorrow) is also during the rally in yields," said Thierry Wizman, global interest rates and currencies strategist at Macquarie Group.

"A large rise in inflation of import prices since 2016 and into late 2018 may be about to show up in CPI goods price inflation as the effect gets distributed (with lags) into the CPI basket," he added.

—CNBC's Tom DiChristopher contributed to this report