US yields rise, weak demand for 20-year auction

(Updates to midafternoon New York time)

By Karen Brettell and Tatiana Bautzer

NEW YORK, Nov 20 (Reuters) - U.S. Treasury yields moved higher on Wednesday as the Treasury Department saw weak demand in an auction and traders assessed when the Federal Reserve may pause its interest rate cutting cycle as U.S. economic growth remains above expectations.

Investors correctly betting that Republican Donald Trump would win the U.S. presidential electionwhile Republicans also take control of Congress helped send yields higher over the past two months.

Market participants are now waiting on clarity over Trump’s policies and the next round of jobs and inflation data that is likely to influence Fed policy.

“It seems like we're going to have to wait until the next nonfarm payroll release and the next CPI release to really see how that informs the Fed," said Michael Lorizio, head of U.S. rates trading at Manulife Investment Management.

A much-stronger-than-expected jobs report for September was followed by a much weaker one for October, though analysts noted that the last release was negatively affected by hurricanes.

Two Federal Reserve governors on Wednesday laid out competing visions of where U.S. monetary policy may be heading.

Michelle Bowman said that with inflation still elevated and moving sideways in the last few months, the Fed needed to be cautious. Lisa Cook voiced confidence in a continued easing of price pressures.

Traders are pricing in a 55% probability the Fed will cut rates by 25 basis points in December, and only a 15% chance that it would be followed by another 25 basis point reduction in January, according to the CME Group’s FedWatch Tool.

The government saw weak demand for a $16 billion auction of 20-year bonds, which sold at a high yield of 4.68%, around 3 basis points above where they had traded before the sale.

Demand for the debt was 2.34 times the amount on offer, the weakest ratio since August 2022. The Treasury Department will also sell $17 billion in 10-year Treasury Inflation Protected Securities on Thursday.

"The poor auction just added to the bearish overhang we have seen in the market" said Kim Rupert, managing director of fixed income at Action Economics. Markets are also predicting that policies favored by President-elect Trump, such as tariffs on imports, may be inflationary.

The yield on benchmark U.S. 10-year notes rose 3.3 basis points to 4.412%, from 4.379% late on Tuesday. They reached 4.505% on Friday, the highest since May 31.

Two-year yields rose 3.6 basis points to 4.308%, from 4.272% late on Tuesday. The yield curve between two-year and 10-year notes flattened by around 1 basis point to 10.4 basis points.

Traders are also closely watching developments in the Russia-Ukraine war after Russian President Vladimir Putin on Tuesday lowered the threshold for a nuclear strike in response to a broader range of conventional attacks.

Concerns about the escalating conflict sent Treasury yields lower on Tuesday as investors sought out the safe haven debt.

Ukraine fired a volley of British Storm Shadow cruise missiles into Russia on Wednesday, the latest new Western weapon it has been permitted to use on Russian targets a day after it fired U.S. ATACMS missiles.

Putin is open to discussing a Ukraine ceasefire deal with Trump but rules out making any major territorial concessions and insists Kyiv abandon ambitions to join NATO, five sources with knowledge of Kremlin thinking told Reuters. (Reporting by Karen Brettell; editing by Jonathan Oatis)