* Market starting to focus on debate on rate hike timing
* U.S. three-year auction sale also pressuring prices
By Gertrude Chavez-Dreyfuss
NEW YORK, June 10 U.S. benchmark 10-year yields
rose to a one-month high on Tuesday, as investors have started
to price in the prospect of higher interest rates following
recent upbeat U.S. economic data and hawkish comments from
Federal Reserve officials.
For some market participants, this year's U.S. government
bond market rally, which saw benchmark 10-year yields plunge to
11-month lows, may have run its course.
The $62-billion sale of new coupon-bearing government debt,
which starts on Tuesday with the auction of U.S. three-year
notes, has also weighed on prices. The U.S. Treasury will sell
$28 billion in three-year notes later in the session.
But the Fed's two-day monetary policy meeting next week has
garnered more attention. Analysts said there could be a
re-assessment of the timing of the first U.S. rate increase.
"The Fed's bias could likely shift to a more hawkish stance.
They're a little worried about financial exuberance and a little
bit of complacency in the market," said Aaron Kohli, interest
rate strategist, at BNP Paribas in New York.
"I think the Fed is looking to shake that complacency next
week. To that end, the market is selling off a little bit."
The most pronounced change came on Monday from St. Louis
Federal Reserve Bank President James Bullard, who is a non-voter
on the Federal Open Market Committee. Bullard said the falling
U.S. unemployment rate, together with other encouraging economic
data, could prompt him to move forward his view on when interest
rates should be raised.
"As the Fed continues to move closer towards its goals of
full employment and 2 percent inflation, the discussion will
increasingly focus on the timing of the first rate hike," said
Allan von Mehren, chief analyst, Danske Bank in Copenhagen.
"We believe this is going to attract more attention in
coming quarters and that there will be a further re-pricing of
the U.S. money market curve, as the market is too complacent
currently when it comes to timing and pace of Fed rate hikes."
The latest Reuters poll showed the majority of Wall Street's
top bond firms don't see the Fed raising interest rates before
the second half of next year and most also now believe the Fed
won't start shrinking its massive balance sheet before it lifts
In mid-morning trading, benchmark 10-year notes
were last down 7/32 in price to yield 2.642 percent, from 2.603
percent late on Monday. Yields hit a one-month high of 2.651
U.S. 30-year bonds fell 13/32 in price to yield 3.472
percent, from 3.439 percent late Monday.
Later in the session, the U.S. Treasury will sell three-year
notes. That will be followed by the sale of $21 bln in 10-year
notes on Wednesday, and $13 billion in 30-year bonds on
(Editing by Nick Zieminski)