TREASURIES-U.S. yields hit 14-month high on global bond sell-off

LONDON, June 11 Tue Jun 11, 2013 7:12am EDT

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LONDON, June 11 (Reuters) - U.S. Treasury yields hit their highest in more than a year on Tuesday as part of a global sell-off of bonds after the Bank of Japan disappointed investors hoping it would take measures to reduce market volatility.

Ten-year U.S. Treasury yields rose 4.5 basis points to 2.26 percent as investors also made room for more supply this week, reaching levels where selling is expected to accelerate. It earlier hit its highest since April 2012 at 2.27 percent.

The Bank of Japan kept monetary policy steady as expected, perhaps judging that recent market turbulence has yet to pose a significant risk to the economy's recovery prospects.

"It seems like it's very much driven by (Bank of Japan Governor Haruhiko) Kuroda's comments," one trader said.

"We have JGBs (Japanese government bonds) getting hit ... We have supply on the horizon and technically it looks like the market (is making) a test at 2.25 percent and the question then becomes how are the mortgage services going to have to hedge their risk."

Investors in mortgage-backed securities hedge those positions by selling U.S. Treasuries. As yields go up, reducing the ability of homeowners to repay their mortgages soon, investors have to further hedge their positions through more sales of U.S. Treasuries. Analysts fear that such hedging will kick in when 10-year yields reach 2.25-2.30 percent.

"Clearly there is policy uncertainty in the U.S. and in Japan, and that's overhanging all core government bonds," Nick Stamenkovic, bond strategist at RIA Capital Markets said.

Investors remain nervous about when the Federal Reserve may begin scaling back its bond-buying program after U.S. jobs data on Friday kept the hope alive but was not strong enough to warrant imminent action.

The U.S. Treasury sells three-year notes later this session, 10-year notes on Wednesday and 30-year bonds on Thursday.

Five-year U.S. yields were 4.4 basis points higher at 1.17 percent and two-year equivalent was 1.2 bps higher at 0.33 percent.

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