Treasury Yields at Six-Week High Following European Debt Selloff

Treasuries fell, pushing yields to the highest level in six weeks, as a selloff in European debt made U.S. securities less attractive.

U.S. government debt briefly erased losses after a report showed the economy barely grew in the first quarter, and as the Federal Reserve wraps up its two-day policy meeting. The gains were short-lived, as investors focused on signs of quickening inflation in Europe that sparked a global bond rout. The Treasury completed this week’s auctions with a $29 billion sale of seven-year notes that drew a yield of 1.82 percent.

“We’ve had the reaction to the bund market,” said David Keeble, the New York-based head of fixed-income strategy at Credit Agricole SA. The advance in bunds “had clearly gotten a little ahead of itself.”

Treasury 10-year yields rose six basis points to 2.06 percent as of 1:02 p.m. New York time, according to Bloomberg Bond Trader data. Yields touched 2.08 percent, the highest since March 16, yet are still below the 2014 close of 2.17 percent.

Fed Statement

The seven-year auction completed a total offering of $105 billion in coupon-bearing debt this week. The U.S. earlier sold $15 billion of two-year floating-rate notes at a high margin of 0.074 percent, the least since November.

The biggest losses on Wednesday were in longer-term debt, which pushed the difference between yields on 30- and two-year Treasuries to its widest since December.

While the Fed’s policy-setting committee is widely expected to raise borrowing costs by the end of this year, the European Central Bank’s bond-buying program has helped support government-bond prices in the U.S. That’s because the program depresses yields on European government debt, making U.S. yields more attractive in comparison.

“Rates in Europe are going up, and the U.S. has to follow suit, because that’s one of the things that has kept U.S. yields down,” said Guy Haselmann, an interest-rate strategist at Bank of Nova Scotia in New York, one of 22 primary dealers that trade with the Fed.

Yields on German 10-year debt rose for a third day, adding 12 basis points to 0.28 percent, the highest since March 17.

September Liftoff

A report that U.S. economic growth stalled in the first quarter was eclipsed by news that a gauge of euro-area growth rose to its highest level since 2009, and a reading of stronger inflation in Germany. Even so, the weak growth raised expectations that the Fed would wait until later this to raise interest rates. That helped minimize declines in short-term Treasuries.

“All throughout the weakness,” short-term debt “stayed pegged because of data dependency” from the Fed, said Jim Vogel, interest-rate strategist for FTN Capital Markets in Memphis, Tennessee.

Most economists project the Fed will wait until at least September before raising borrowing costs. Central-bank officials, who are watching employment and inflation data to ensure the economy can withstand higher rates, will release a policy statement at 2 p.m. Washington time.

“Oil is moving higher and we’ve seen some recent signs of a bottoming or pick-up in inflation” in Germany and the euro zone, said Tyler Tucci, a U.S. government-bond strategist at Royal Bank of Scotland’s RBS Securities unit in Stamford, Connecticut, a primary dealer. “The market had put so much downward pressure on yields. It’s now being acted on by an equal and opposite force.”

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