June 27, 2017 / 7:08 PM / a month ago

TREASURIES-U.S. yields rise with European debt after upbeat Draghi comments

3 Min Read

 (Adds Yellen, Harker comments, auction result; updates prices)
    * ECB's Draghi takes upbeat view on economy
    * Yellen says appropriate to rates rates gradually
    * Five-year, 30-year yield curve flattest since 2007
    * Treasury sells $34 bln in five-year notes

    By Karen Brettell
    NEW YORK, June 27 (Reuters) - U.S. Treasury yields rose on
Tuesday in sympathy with European government debt weakness after
European Central Bank President Mario Draghi fueled expectations
that the ECB is closer to announcing a reduction of stimulus.
    Draghi indicated that the central bank might tweak its
stimulus so that it does not become more accommodative as the
economy recovers.             
    “He surprised the market with that upbeat stance,” said Tom
di Galoma, a managing director at Seaport Global in New York.
“The European government bond market didn’t take it very well.”
    Treasury yields rose in line with European bonds.
            
    Benchmark 10-year notes             dropped 18/32 in price
to yield 2.20 percent, up from 2.14 percent late on Monday.
    The Treasury yield curve between five-year notes and 30-year
bonds                steepened after earlier falling to 92.70
basis points, the flattest level since late 2007.
    The difference between yields on two-year and 10-year notes
               also got as low as 76.80 basis points, its lowest
level since Sept. 2.
    The yield curve has flattened in the past month as Federal
Reserve officials including New York Fed President William
Dudley indicated that further monetary policy tightening was
likely.
    That has led short- and intermediate-dated debt, which is
more sensitive to interest rate changes, to underperform while
concerns about tepid growth and falling inflation have supported
long bonds.
    Longer-dated debt has also rallied as investors reach for
higher yields.
    “Funds are really defensive and believe that yields could
really ratchet lower, and they’re putting money into duration,”
said di Galoma.
    Fed Chair Janet Yellen said on Tuesday that it is 
appropriate to gradually raise rates and noted that the U.S.
central bank is carefully watching inflation expectations.
            
    The Fed may have to rethink its interest rate hike plans if
inflation continues to wane, Philadelphia Fed President Patrick
Harker said.             
    The Treasury Department sold $34 billion in five-year notes
to the weakest demand in four months on Tuesday. The ratio of
bids to the amount of five-year notes offered              came
in at 2.33, the lowest since February.             
    The notes sold at a high yield of 1.828 percent, just above
where it traded before the auction.             
    The government will sell $28 billion in seven-year notes on
Wednesday, the final sale of $88 billion in sales of new
coupon-bearing supply this week.
    The government sold $26 billion in two-year notes to strong
demand on Monday.             

 (Editing by Chizu Nomiyama)
  
 
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