U.S. 10-Year Yields Rise From 2-Month Low on Risk Appetite Gain

  • Fed's Lockhart says he favors tightening of monetary policy
  • Treasury will auction $58 billion of notes, bonds this week

Treasuries declined, with 10-year note yields rising from the lowest in more than two months, as concern eased that China’s tumbling stocks and the resulting tumult in emerging markets will have a lasting effect on the U.S. economic outlook.

Yields on 30-year bonds increased the most in almost two weeks as U.S. stocks rebounded. Federal Reserve Bank of Atlanta President Dennis Lockhart said he favors continued tightening of monetary policy this year, and a global selloff in stock markets is unlikely to affect the U.S. economy. The U.S. will auction $58 billion in notes and bonds starting Tuesday.

"There’s some semblance of stability in the equity markets and that’s caused a slight backup in Treasury yields,” said Charles Comiskey, head of Treasury trading in New York at Bank of Nova Scotia, one of the 22 primary dealers obligated to bid at U.S. debt sales.

Longer-dated bonds trailed those due in two years before sales of $34 billion of 10- and 30-year securities. The extra yield, or spread, that investors get for holding 30-year bonds instead of two-year notes reached the most since Dec. 9 on a closing basis. The Treasury plans to auction $24 billion of three-year debt on Tuesday. The steeper yield curve may also signal that investors expect faster economic growth to accelerate inflation.

Higher Yields

U.S. 10-year note yields rose six basis points, or 0.06 percentage point, to 2.18 percent as of 5 p.m. New York time, according to Bloomberg Bond Trader data. The 2.25 percent security due November 2025 fell 17/32, or $5.31 per $1,000 face amount, to 100 21/32. The yield dropped 19 basis points during the previous seven trading days and reached 2.11 percent, the lowest since Oct. 29.

The 30-year bond yield climbed six basis points to 2.97 percent, the biggest increase since Dec. 29.

Last week’s gains in bond prices came amid China’s efforts to push the yuan lower, which sent stocks down around the world.

"There is no reason" 10-year yields can’t drop below 2 percent this month, Jabaz Mathai, strategist at Citigroup Inc., wrote in a report dated Jan. 8. Investors have built up overweight positions in corporate debt and any forced selloff could spur demand for Treasuries, he said.

Futures traders see a 40 percent chance that policy makers will lift the benchmark rate by their March meeting, with odds on a move by the April gathering increasing to 45 percent. The calculation is based on the assumption that the effective fed funds rate will trade at the middle of the new Federal Open Market Committee target range after the next increase.

The struggles in equities keep the 10-year yield "somewhat contained," said Priya Misra, head of global rates strategy at TD Securities LLC in New York. The Fed "can certainly go in March -- they will still be extremely accommodative."

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