Bond yields, stocks extend rise after upbeat U.S. data
NEW YORK (Reuters) - U.S. and European government bond yields surged on Thursday, with the yield on U.S. 10-year Treasury notes touching 3 percent, as stronger-than-expected U.S. economic data supported the view the Federal Reserve will begin scaling back its bond purchases this month.
U.S. stocks climbed for a third day as the data gave further signs of improving U.S. economic conditions. Growth in the U.S. services sector accelerated in August to its fastest pace in almost eight years, and was stronger than economists expected.
Stocks' gains were limited, however, by the increased expectations of Fed tapering, as well as the possibility of a Western-led strike against Syria, a concern that drove shares down sharply last week.
The economic data, which follows an upbeat U.S. manufacturing report earlier this week, bolstered expectations the Fed will announce later this month that it will begin winding down its stimulus plan.
The views prompted a global bond rout and drove down gold prices. Yields on 10-year Treasuries surged to 25-month highs, notching a fourth straight session of gains.
"You are seeing a normalization in the economy so you should see a normalization in rates," said Craig Elder, fixed income strategist at Baird Private Wealth Management in Milwaukee.
Global central banks have attempted to talk down expectations of any rate rises and left loose policies unchanged, as data from China, Britain and the euro zone pointed to a global economic recovery that is gathering steam.
As widely expected, the European Central Bank, the Bank of Japan, Sweden's Riksbank, and the Bank of England all left policy unchanged on Thursday.
Benchmark 10-year Treasury notes last traded down 26/32 in price, yielding 2.992 percent, from 2.897 percent late on Wednesday. The 10-year yield briefly rose above 3 percent late in the session, a level not seen since July 2011.
The two-year note yield traded above 0.50 percent for the first time since June 2011.
Investors also sent German and British 10-year government debt yields to their highest levels in 1-1/2-years and since July 2011, respectively.
The next big economic event will be Friday's U.S. employment report. If it confirms a job market recovery, that would strengthen the view the Fed could begin scaling back its $85 billion per month of debt purchases sooner rather than later.
MSCI's world equity index .MIWD00000PUS was up 0.2 percent, and European shares .FTEU3 ended up 0.5 percent.
On Wall Street, the Dow Jones industrial average .DJI was up 6.61 points, or 0.04 percent, at 14,937.48. The Standard & Poor's 500 Index .SPX was up 2.00 points, or 0.12 percent, at 1,655.08. The Nasdaq Composite Index .IXIC was up 9.74 points, or 0.27 percent, at 3,658.79.
GOLD DOWN, OIL ENDS HIGHER
Gold sank to two-week lows on heightened expectations of Fed tapering. Building on Wednesday's 1.5-percent drop, spot gold was down 1.6 percent at $1,368.14 an ounce.
Oil futures rose as bullish U.S. economic data and a drawdown in U.S. crude inventories suggested increasing use in the world's biggest oil consumer. Gains were capped as the U.S. data hinted the Fed could be closer to reducing its bond buying.
Also, investors worried that supply disruptions could persist in the Middle East after a U.S. Senate panel voted on Wednesday to support a military strike on Syria.
Brent crude rose 35 cents to settle at $115.26 a barrel. U.S. oil gained $1.14 to settle at $108.37.
The possible military strike against Syria in reaction to its alleged use of chemical weapons was also dominating discussions at the meeting of leaders from the Group of 20 economies in St. Petersburg.
Obama faced growing pressure from world leaders at the summit not to launch military strikes in Syria.
At the same time, the prospect of higher rates spilling over to affect the rest of the world prompted Russia and China to warn at the G20 leaders' meeting that the end of the Fed's bond-buying program could have a profound impact on the global economy.
DOLLAR UP AGAINST EURO
The dollar rose against the euro as ECB President Mario Draghi said the bank's Governing Council expects key ECB interest rates to remain at present or lower levels for an extended period. The dollar was also strong after the solid U.S. economic data.
The dollar index .DXY was up 0.6 percent at 82.625, not far from a seven-week high of 82.671 touched earlier in the New York session. The euro was down 0.7 percent at $1.3119 after falling to a seven-week low of $1.3109.
U.S. and world services PMI link.reuters.com/syx44t
World interest rates: link.reuters.com/xyb96s
Asset moves since taper hint: link.reuters.com/hyb68t
(Additional reporting by Richard Hubbard in London and Nick Olivari, Anna Louie Sussman and Richard Leong in New York; Editing by Stephen Nisbet, Nick Zieminski and Chris Reese)
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