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20-year bond auction sees weak demand, yields rise

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Fiscal concerns and tax bill also affect yields

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20-year yield hits 18-month high

(Updates to afternoon US trading)

By Karen Brettell and Chuck Mikolajczak

May 21 (Reuters) - U.S. Treasury yields were mostly

higher on Wednesday, extending their ascent after a weak auction

of 20-year bonds as investors continued to monitor the progress

of a tax bill in the U.S. Congress.

A $16-billion sale of 20-year bonds saw soft demand,

with a high yield of 5.047%, in what was seen as a test of

foreign demand for U.S. debt, as concerns over the fiscal and

inflation outlook increase.

A deteriorating fiscal outlook has captured the market's

attention this week after Moody's Investors Service on Friday

cut the United States' sovereign credit rating from the top

"Aaa."

The yield on the 20-year note climbed to 5.125% after the

auction, its highest level since early November 2023. It was

last up 12.4 basis points to 5.114%.

"The interest rate environment is reflecting concerns regarding

U.S. (budget) deficits, with some estimates around the new tax

bill showing it would add trillions to the deficit," said George

Cipolloni, portfolio manager at Penn Mutual Asset Management.

"(Long-term) yields of 5% with another auction not doing well

is not a sign people are feeling good about the U.S. economy."

Yields at the longer end of the Treasury curve have been rising

steadily this month, driven by domestic fiscal concerns and

worries that President Donald Trump's unpredictable economic

policies will not only stoke inflationary pressures but also

erode the appeal of U.S. assets. Yields in Japan and the euro

zone have risen too this week.

Some investors are concerned that the tax and spending bill

has fewer spending cuts than previously hoped.

The bill faces a critical test on Wednesday as a handful of

Republican House representatives headed to the White House over

concerns it does not sufficiently cut spending.

The yield on the benchmark U.S. 10-year Treasury note

jumped 11.2 basis points to 4.593% after hitting a

three-month high of 4.607%.

The yield on the 30-year bond shot up 11.6 basis

points to 5.083% after reaching 5.098%, its highest since

October 2023.

Longer-dated yield increases have been due to "a combination

of concern over inflation and fiscal" issues, with easier tax

policies being a newer factor in recent days, said Stephen Gola,

head of U.S. Treasuries sales and trading at StoneX Group.

Gola noted that hedge funds have been putting on steepener

trades, or bets that longer-dated yields will rise relative to

shorter-dated ones, which could be having an outsized impact on

market moves.

The Treasury will also sell $18 billion in 10-year Treasury

Inflation-Protected Securities on Thursday.

The 2-year note yield, which typically moves in step

with interest rate expectations, rose 4.3 basis points to

4.013%.

The yield curve between 2-year and 10-year notes

steepened by 6 basis points to 57.4 basis points.

The break-even rate on five-year U.S. Treasury

Inflation-Protected Securities was last at 2.435%

after closing at 2.423% on Tuesday.

The 10-year TIPS break-even rate was last at

2.368%, indicating the market sees inflation averaging about

2.4% a year for the next decade.