US Treasury yields rose on Tuesday with the benchmark 10-year yield hovering near a four-year peak as investors made room for this week's deluge of $258 billion of government debt supply. The Treasury Department has ramped up its borrowing on the open market in anticipation of a higher deficit from last year's major tax overhaul and a two-year budget deal that will increase federal spending over the next two years.

The government is also relying more on private investors to buy its debt as the Federal Reserve has pared its Treasury purchases in a bid to shrink its $4.4 trillion balance sheet. "Supply is very, very heavy this week," said Mary Anne Hurley, vice president of fixed income at D.A. Davidson in Seattle. "Auction sizes will become bigger, bigger this year."

Tuesday's wave of supply, which comprised of $151 billion in bills and $28 billion in two-year fixed-rate notes, fetched mixed reception from investors. In light of the recent market volatility, some investors may be drawn to these short-dated Treasuries as safe havens, analysts said.

A sell-off on Wall Street with the Dow falling 1 percent fed some safe-haven demand for Treasuries. Still, concerns about more rate hikes from the Fed and the possibility of further increases in federal borrowing may keep a lid on demand at this week's auctions, they said.

"I suspect, however, that when the next economic downturn eventually comes, tax receipts fall, and the deficit widens that Treasury spreads will widen further," said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott in Philadelphia. Analysts are wary of the remaining Treasury supply for this week: $35 billion in five-year notes on Wednesday and $29 billion in seven-year notes on Thursday.

Medium-term Treasuries were hit hard last week following stronger-than-forecast inflation data that stoked bets the Fed may increase rates at a faster pace. The Treasury will also sell $15 billion in two-year floating-rate notes on Thursday. Moreover, investors await the US central bank's minutes on its January 30-31 policy meeting, which are due for release at 2 pm (1800 GMT) on Wednesday. They may contain clues on policy-makers' view on future rate increases.

The 10-year Treasury yield was 2.888 percent, up 1.1 basis points from late on Friday. It reached 2.944 percent last week, a four-year peak. The two-year yield was 2.223 percent, 3.4 basis points higher than late Friday, while the five-year yield was up nearly 2 basis points at 2.643 percent after touching 2.689 percent, the highest since April 2010. US financial markets were closed on Monday for the Presidents Day holiday.

Copyright Reuters, 2018