Demand for Treasury bonds is showing early signs of weakening as US plans to increase supply

• The Treasury Borrowing Advisory Committee said there are early signs of waning demand for US bonds.
• "Demand for US Treasuries may have softened among several traditional buyers."

Demand for Treasury bonds is starting to weaken among investors just as the federal government is increasing the supply of US debt.

The Treasury Borrowing Advisory Committee's quarterly report to Secretary Janet Yellen on Wednesday noted the recent surge in US bond yields and offered some explanations, such as strong economic growth, tight labor market, and expectations for future central bank policy.

It also flagged the view that there's a growing supply-and-demand imbalance for Treasurys amid ballooning deficits and the Federal Reserve's balance sheet reductions.

"Demand for US Treasuries may have softened among several traditional buyers," TBAC wrote.

The rising US dollar may also pressure some foreign central banks to sell Treasury bonds to help prop up their currencies, the report added.

It also highlighted the longer end of the debt spectrum, with an auction of 30-year bonds last month seeing soft demand.

"Treasury auctions continue to be consistently oversubscribed but there may be some early evidence of waning demand," TBAC added.

While there is still "reasonable demand" for Treasurys from domestic and international investors, it has not kept pace with the increase in supply, according to the report.

The warning comes as the Treasury Department provided fresh updates on its borrowing plans.

On Monday, the department said it expects to borrow $776 billion in the October-December quarter, with borrowing projected to climb to $816 billion for the January-March period.

On Wednesday, it announced plans to sell $112 billion in debt next week to refund maturing notes, raising about $9 billion in additional funds.

The total was slightly less than the $114 billion anticipated, and the planned issuance of 10- and 30-year bonds was less than Wall Street forecasts. Meanwhile, the sale of short-duration securities will grow by the same amount it did in August.

Long-dated yields fell in response to the Treasury's announcement, with the 10-year rate shedding over 6 basis points to 4.812% on Wednesday. The 30-year yield moved down from the 5% range, after breaching the threshold last week.

In August, the Treasury raised auction sizes for the first time in years, contributing to the massive bond market retreat that sent yields soaring.