(Bloomberg) -- US bonds rallied Wednesday, dragging down yields to levels not seen in months, as strong demand for an auction suggested that investors are confident inflation will keep decelerating.
Rates on five- to 30-year Treasuries declined by at least 10 basis points on the day, after an auction of five-year notes fared better than expected. The $58 billion sale was awarded at 3.801% — the lowest since May — after trading at 3.815% immediately prior to the auction, and mostly in excess of 3.86% since the sale was announced last week. Yields on 10-year Treasuries slumped to 3.79%, a rate last seen in July.
An auction of two-year notes on Tuesday also drew a below-anticipated yield, indicating that investors were willing to settle for more modest returns. The Treasury market is on course for a second-straight steep monthly gain, fueled by evidence that inflation is on a path toward the central bank's target after two years of interest-rate increases. Investors anticipate US rate cuts beginning next year.
Typically, “auctions go as the market goes,” and “there's obviously been tremendous demand for Treasuries for the last eight weeks” based in part on the inflation trend, said Dan Mulholland, senior managing director at Crews & Associates.
Technical factors have contributed, though, including anticipation of buying related to the turn of the year and a normal seasonal dearth of other types of debt issuance, such as corporate bonds, Mulholland said.
Treasuries rallied into Wednesday's auction thanks in part to earlier gains for many European bond markets and in anticipation that month-end will spur buying by passive investors. Below-average trading volumes due to the holiday-shortened week also likely increased the impact of flows on prices.
“This has been an extraordinary couple of months for the bond market,” said James Camp, managing director at Eagle Asset Management. “People are finally gathering the peak of the Fed, or the end of the Fed tightening cycle, is unambiguously good for bonds.”
The US government is set to sell $40 billion of seven-year notes on Thursday.
--With assistance from Carter Johnson.
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