Treasurys Weighed Down by Supply

Treasury yields are rising in one of the biggest moves of the year, under the weight of the U.S. government's hefty borrowing.

Traders point to no single event as a catalyst in the move, but they all say the more than trillion dollars in new issuance this year alone is a big factor, and the costly expectations of the freshly signed health-care reform bill has not been lost on the marketplace.

The Treasury's auction Wednesday of $42 billion in 5-year notes was surprisingly weak, and saw a larger-than-usual amount going to Wall Street's dealers. The participation by indirect bidders, usually foreign central banks, was only 40 percent, compared to an average 49 percent.

At the same time, the 10-year swaps rate moved to less than zero for the first time Tuesday, which some see as a sign of stress in the market. The selloff in the 10-year Treasury Wednesday pushed its yield higher, to 3.8 percent. Swaps are used by corporations to manage cash flows on their debt by turning long term liabilities into short term floating rate liabilities.

"This is an issue of just supply. There's more supply in Treasurys and less supply in corporate and other Libor-related instruments. Now you're seeing the relative differential between the two," said Jim Caron, head of interest rate strategy at Morgan Stanley.

"It's a perfectly logical explanation of why the rates are moving...it was bound to happen. It's almost like the dike has some cracks in it, starts to leak some water. it's a sign that Treasurys are weighty and cumbersome and starting to weigh on the market," he said.

Caron says don't be surprised to see rates move higher.

"We had some data coming out that's not that great and yields are going up. Yields are going up for non-economic reasons and that's worrisome," he said.

Questions? Comments? Email us at marketinsider@cnbc.com