2-Year Treasury auction provides first test for hawkish Fed rate stance

U.S. Treasury bond yields were steady in overnight trading ahead of a key government bond auction later in the session that could provide the first major test to Federal Reserve Chairman Jerome Powell's newly hawkish rate stance.

The Treasury will sell $42 billion in new 2-year notes later this morning as part of its new quarterly refunding program that includes bigger auction sizes as it looks to raise around $103 billion from coupon-bearing bond sales over the coming three months.

The sale comes just one trading day after Fed Chair Powell surprised markets on Friday with hawkish signaling on interest rates during his keynote address to the central bank's Jackson Hole symposium, suggesting the need for at least one more increase between now and the end of the year, and possibly two, in order to bring inflation back closer to the Fed's 2% target.

The comments added some 10 basis points to short-term Treasury note yields and caught bond traders -- who had place the highest short bets on Treasury bond futures since 1990 going into Powell's speech, according to CFTC data -- largely by surprise. 

The auction, also comes shortly on the heels of the Fitch Ratings decision to lower its triple-A credit grade on U.S. debt, which triggered a volatile market reaction last week and, alongside some stronger U.S. economic data, pushed 10-year yields to a 17-year high of 4.366% early last week.

Benchmark 10-year notes were last seen pegged at 4.237% in early New York dealing, with 2-year notes trading at 5.075%.

The 2-year note auction results will be published at 11:30 am Eastern time.

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