US Treasury yields rose on Tuesday on strong Wall Street gains and in line with European government yields after a European Central Bank official said the ECB's massive bond purchase program may not be continued later this year. Benoit Coeure, the ECB board member who oversees the bank's market operations, told Caixin Global, a Chinese financial magazine, he sees "a reasonable chance" that the 2.55-trillion-euros stimulus program will not be extended when it expires in September.
"European bonds are weaker because of comments from Coeure," said Karl Haeling, vice president at Landesbank Baden-Wurttemberg in New York. "You have a stronger stock market." Investors piled back into stocks at the start of 2018, after Wall Street scored its strongest performance in four years in 2017, buttressed by steady economic growth, solid corporate earnings and the most dramatic overhaul of the US tax code in 30 years.
US government bonds produced a 2.3 percent annual return last year, as low inflation offset three interest rate increases from the Federal Reserve, according to an index compiled by Bloomberg and Barclays. This compared with a 19.5 percent yearly gain for the S&P 500. At 3:01 pm (2001 GMT), the benchmark 10-year Treasury yield was up 5 basis points at 2.460 percent following a 2 basis-point dip last year.
The five-year yield ended at 2.246 percent after touching its highest level since April 2011 earlier in the day, while the two-year yield retested a nine-year peak of 1.927 percent. "Part of it is early-year optimism," bolstered by assessments of the effects of tax reform on stocks, said Aaron Kohli, an interest-rate strategist with BMO Capital Markets in New York.
But some of the optimism may simply reflect the new year. "There's a strong seasonal bias. Historically, 10-year yields_tend to peak out in Q1," Kohli added. On the supply front, traders increased purchases of US three-month Treasury bills at a record-size auction on Tuesday in a sign they expect Congress to reach a deal to raise the debt ceiling by late March.
Looking ahead, yields may be affected by the release of Institute for Supply Management manufacturing data on Wednesday as well as the release of minutes from the Federal Reserve's December policy-setting meeting. Kohli said the manufacturing data could prove to be pivotal. "The market is getting fairly optimistic about growth, and if that doesn't keep up that's where you'll see the nail in the coffin for higher yields," he said.
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