• US auctions soft but not worrying - analyst
• Elevated Treasury yields could present buying opportunities
• Indirect bids weak for 3-year, 10-year notes

By Gertrude Chavez-Dreyfuss

NEW YORK, May 14 (Reuters) - Rising inflation risks driven by the surge in oil prices are weighing on investor appetite for U.S. Treasuries, compounding a broader deterioration in demand that has been building since the onset of the Middle East conflict.

A run of soft auctions this week ? spanning three-year notes, 10-year notes and 30-year bonds ? underscored the fragile tone, with yields on all three issues pricing above pre-auction expectations. That's a sign investors are demanding higher compensation to absorb supply.

The silver lining, however, is that yields at these elevated levels should provide good entry points to get back into Treasuries, analysts said.

The weak reception points to a market still adjusting to a shifting inflation outlook rather than a one-off bout of indigestion - but doesn't necessarily mean a sharper adjustment lies ahead, analysts said.

The latest 30-year bond sale on Wednesday stopped at 5.046%, the highest yield for that maturity since August 2007, while the three- and 10-year notes also cleared at elevated yields relative to forecasts.

"It's certainly something to keep an eye on," said Zachary Griffiths, head of macro and investment grade strategy at CreditSights.

"Obviously there are different considerations for the threes, 10s and 30s in terms of investor base, but in general we don't necessarily think weak auctions would mean yields will be meaningfully higher from here."

Together, the soft auctions reinforce the view that higher oil prices are feeding into term premiums, as investors recalibrate for stickier inflation and a potentially longer period of fairly restrictive monetary policy.

That repricing has already been evident in the secondary market. Since early March, benchmark 10-year yields have climbed 43 basis points to near an 11?month high, while 30-year yields have risen more than 30 basis points to levels last seen mid-2025.

The move reflects not just economic data surprises, but a growing reluctance among investors ? particularly price-sensitive buyers ? to step in aggressively at auctions.

Demand dynamics within the auctions were mixed but telling. Indirect bids, a proxy for foreign participation, came in below average for the three- and 10-year notes, hinting at softer overseas demand at a time when higher hedging costs and global inflation risks may be eroding the relative appeal of Treasuries.

Indirect bids for 30-year bonds held up somewhat better.

"I don't think the auctions are worrying at all," said Jan Nevruzi, U.S. rates strategist at TD Securities. "They were soft, but not that bad."

Overall the weak auctions do not necessarily signal a disorderly sell-off. Analysts argue that yields are approaching levels that could begin to attract more durable demand, particularly as near-term event risk fades.

"It is worth emphasizing that now the auctions are in the rearview mirror, including this week's data calendar, we could see a bid emerge for Treasuries at these prices because there's just less interest rate risk for the next week or so, outside of geopolitical developments," said Will Compernolle, macro strategist at FHN Financial in Chicago.

(Reporting by Gertrude Chavez-Dreyfuss, editing by Colin Barr and Lincoln Feast.)

(( gertrude.chavez@thomsonreuters.com ; 646-301-4124) )

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Keywords: USA-BONDS/AUCTIONS