US Treasury yields rose to more than three-week highs on Thursday as oil prices held near recent highs, reducing demand for safe-haven US bonds, and as high quality European government bond yields spiked. US bond yields increased on Wednesday after a strong rally in oil prices caught some investors by surprise, and selling continued on Thursday after yields broke above their recent range.
"The optics of higher oil led to some small lot selling yesterday that then got compounded," said Jim Vogel, an interest rate strategist at FTN Financial in Memphis, Tennessee. US benchmark 10-year Treasury notes fell 5/32 in price to yield 1.87 percent, up from 1.85 percent on Wednesday and 1.78 percent on Tuesday. Weakness in high-grade European government bonds, which had supported US debt, added to pressure after it was reported that Greece had a primary surplus last year.
"One of the big anchors on Treasury rates the last two weeks has been very stable high-grade sovereign yields in Europe and as Greece - at least for the short run - proved some of the haters wrong with some budget surpluses, the haven bid for German, French and UK debt sort of disappeared," Vogel said. Euro zone officials said the number was already discounted in talks between Athens and lenders on reforms and debt relief. The head of the ECB robustly defended its cheap money policy on Thursday against sharp criticism from Germany, as the country's leader entered a debate that has driven a wedge between the euro zone's central bank and its biggest economy.
Relatively heavy supply corporate debt supply added to bond weakness on Thursday, though higher yields may have helped demand in the government's auction of $16 billion in five-year Treasury Inflation-Protected Securities. The bonds sold at a high yield of -0.195 percent, more than 2 basis points below where the debt had traded before the sale. A large focus for the market is now the Federal Reserve's meeting next week, where the US central bank is not expected to raise interest rates, but could give an indication of rate hikes at future meetings.