TREASURIES-U.S. bond yields rise on bold ECB plan, upbeat data

Thu Sep 4, 2014 4:40pm EDT

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By Richard Leong and Daniel Bases

NEW YORK, Sept 4 (Reuters) - U.S. Treasuries yields rose on Thursday after the European Central Bank surprised investors with a bold plan to help the sagging euro zone economy, while stronger U.S. economic data supported views the Federal Reserve may raise interest rates in mid-2015.

Amid the market sell-off, bargain-minded investors sat on the sidelines ahead of Friday's U.S. August payrolls data and scheduled talks in Minsk aimed at ending a five-month war between Ukraine and pro-Russian separatists.

"We are seeing pretty good domestic economic news. The ECB is getting more aggressive with its policy action," said Andrew Richman, fixed income strategist at SunTrust Private Wealth Management in Palm Beach, Florida.

A surprise shrinkage in the U.S. trade deficit in July and a services industries index hitting a 6-1/2 year peak, together with jobless claims and private job growth data, led some analysts to raise their economic outlook.

The data compounded early selling from the ECB's unexpected cut in its policy rate to a record low of 0.05 percent.

In addition to lower rates, the ECB also introduced plans to buy asset-backed securities and covered bonds in a bid to loosen credit in the 18-nation block. Sources told Reuters it could amount to 500 billion euros ($650 billion) over three years.

The yield gap between U.S. two-year Treasuries and German Schatz grew to 0.60 percent on Thursday, the widest since May 2007.

Longer-dated Treasuries yields, which had fallen on safe-haven demand due to the fighting in eastern Ukraine, rose more than their shorter-dated counterparts.

The benchmark 10-year Treasuries yield rose 4 basis points to 2.450 percent, just a tad below the 2-1/2 week high set on Wednesday. It hit a 13-month low at 2.303 percent in mid-August.

The 30-year yield rose to 3.209 percent, up more than 5 basis points from Wednesday and up 14 basis points in four days, the most in such a time span in three months.

Competition from U.S. corporate bonds also spurred selling in Treasuries. Investment-grade banks and companies have raised $39 billion in the past two days, putting the sector on track for its third busiest week of 2014, according to IFR, a unit of Thomson Reuters.

Looking ahead, an August payroll increase in line with forecasts on Friday might not cause another round of selling in Treasuries, said Jennifer Vail, head of fixed income research at U.S. Bank Wealth Management in Portland, Oregon.

Since the spring, benchmark yields have typically risen in the days preceding the monthly payrolls report and would fall the rest of the month.

"We are probably going to repeat the pattern. I don't expect a blowout report," Vail said. (Reporting by Richard Leong; Editing by Tom Brown and Dan Grebler)

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