Investors balked at the U.S. Treasury's auction of 30-year bondsas Federal Reserve Chairman Jerome Powell cited low inflation asgrounds for a potential interest-rate reduction that's widelyexpected at the end of this month.

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Bidders at the Thursday sale drove the yield on the re-openedbond line, which was first auctioned in May, to 2.64 percent. Thatwas almost three basis points above the prevailing market level atthe bidding deadline, and compared with 2.607 percent at lastmonth's sale. The dropoff in demand—which was also reflected in aweaker-than-average bid-to-cover ratio—showed investors pushingback on the rallies that took the 30-year yield to a multiyear lowof around 2.45 percent earlier this month.

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Yields on 30-year debt climbed as much as 8 basis points on theday to 2.66 percent, extending the selloff in longer-end Treasuriesthat followed the release of stronger-than-expected consumer priceinflation data earlier in the U.S. morning. The 30-year yield wasmore than 10 basis points below current levels just before FederalReserve Chairman Powell's dovish testimony Wednesday.

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“The curve should be a lot steeper,” said Glen Capelo, a traderwith Academy Securities. “This is the first time in my lifetime theFed is actually trying to create inflation,” he said by email afterthe auction.

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Take-up at Thursday's auction was particularly poor amongindirect bidders, a class of investors that includes pensions andmutual funds. Their share of 50 percent was the lowest sinceFebruary 2015, and well below the 60.8 percent they took at theprior auction in May.

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— With assistance from ElizabethStanton.

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