(Bloomberg) — The Treasury market extended its first gain in five days after an auction of 10-year notes drew good demand, quelling concern about the US fiscal outlook.

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Yields dipped across maturities with the 10 year’s falling about five basis points to a session low of 4.35% following a smooth $39 billion auction of those notes at 1 p.m. New York time.

“The solid results added to today’s improved tone in the market,” said Oxford Economics analyst John Canavan. “They were good enough to offer a sense of relief given concerns about Treasury deficits.”

The auction drew a yield of 4.362%, slightly lower than indicated by pre-auction trading just before the bidding deadline, indicating demand exceeded expectations.

Yields had been climbing over the past week after strong employment data curbed expectations for Federal Reserve interest-rate cuts and US legislation was passed that extends tax cuts. Minutes from the June Federal Open Market Committee meeting are due later Wednesday and a $22 billion sale of 30-year bonds is set for Thursday.

Shorter-maturity yields also declined, with the two-year note’s dropping by more than five basis points from the day’s high, supported by strong demand for August federal funds futures.

Despite the June jobs data, anticipation of Fed rate cuts has been building amid constant pressure on the central bank from President Donald Trump, who has said Chair Jerome Powell will be replaced when his term ends by someone who’ll do his bidding. Trump on Wednesday said the US policy rate was at least three percentage points too high.

What Bloomberg Strategists say:

“Contrary to expectations, there was no concession for Wednesday’s 10-year reopening, and that price action seemed to send a message. All of this has kept a bid tone to the Treasury market ahead of the Fed minutes. In any event, perhaps Thursday’s long bond auction will prove to be a bit more daunting.”

— Cameron Crise, Macro Strategist, Markets Live

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Higher borrowing

Higher borrowing costs have been a global phenomenon amid heightened sensitivity to fiscal concerns. Japanese bond yields surged this week on fears politicians will promise to loosen the purse strings as they court voters ahead of elections.

In the US, investors have focused on the fiscal implications of Trump’s tax law, which will add $3.4 trillion to the national debt over a decade, according to the non-partisan Congressional Budget Office.

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Still, bond market reaction would likely constrain any further “maximalist” budget plans, according to BlackRock Inc., which cited the violent selloff in Treasuries on April 9.

“If there’s any sign that this is a very quick resetting, and we’re in a world where we have a 5% 10-year yield quickly on a sustained basis, the whole budget arithmetic — that is already pretty challenged — is out of the window,” Jean Boivin, head of the BlackRock Investment Institute, said in an interview on Bloomberg TV.

Uncertainty surrounding US trade policy is meanwhile evident in inflation metrics, with Trump expected to announce more details as he pushes forward with his aggressive tariff plan.

Ahead of the release of the FOMC minutes, rates swaps imply the central bank will keep rates in a range of 4.25% to 4.5% at its meeting later this month but deliver two quarter-point reductions by the end of 2025.

An analysis by strategists at Deutsche Bank AG shows this is the fourth year running where markets have bet on a more dovish path for US interest rates than what transpired.

–With assistance from Edward Bolingbroke, Isabella Ward and David Goodman.

(Updates with 10-year auction results.)

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