By Richard Leong
(Reuters) - Wall Street's bond firms are sopping up a growing amount of Treasury debt as the U.S. government seeks to fund a rising budget deficit stemming from the massive tax cut enacted last December, Treasury Department data released on Tuesday showed.
In late September, the Treasury sold a combined $106 billion in two-year, five-year and seven-year fixed-rate debt to soft investor demand.
The Treasury will sell three-year, 10-year and 30-year bond supply this week, worth $74 billion.
In addition to the growing debt stockpile, analysts blamed last week's sharp bond market sell-off on inflation worries stemming from upbeat economic data, which may result in a faster pace of interest rate increases from the Federal Reserve.
Rising bond yields and the trade spat between Washington and Beijing have boosted the dollar, reducing overseas demand for Treasuries in recent months.
Growing U.S. yields appeal to some foreign investors, but a lofty greenback has made it more expensive to hedge against other currencies, analysts said.
The benchmark U.S. 10-year Treasury note's yield hit a seven-year high at 3.261 percent on Tuesday.
In Japan, investors reduced their U.S. bond holdings in August when U.S. yields were lower than current levels.
At the Treasury auctions two weeks ago, foreign investors bought fewer two- and seven-year debt issues than in the previous month, but they purchased $4.337 billion in five-year notes, the most since March.
As foreign purchases at Treasury auctions have waned, bond dealers have increased their buying, though they prefer to resell them quickly at a profit.
Wall Street's 23 top bond firms, or "primary dealers," in particular may have done so to comply with requirements to maintain their status to do business directly with the Federal Reserve.
In late September, bond dealers bought $17.701 billion in two-year notes, the most since July 2014 and up from $15.698 billion the previous month.
They purchased $13.734 billion in five-year debt at a decade-high yield of 2.997 percent. That was the highest amount they bought since July 2016 and up from $9.802 billion in late August.
They bought $8.379 billion in seven-year notes, the most since September 2016 and up from $7.151 billion a month earlier.
The two- and seven-year notes were sold at decade-high yields of 2.829 percent and 3.034 percent, respectively.
Investment funds' purchases at the Treasury auctions in late September were within their recent average, the Treasury data showed.