* U.S. sells 3-year notes at highest yield in over 3 years
* Weaker German data, stock prices stoke bids for bonds
* Fed's Kocherlakota sees inflation holding below 2 percent
* Fed buys $1.07 billion of Treasuries due 2036-2044
(Updates market action; adds quote)
By Richard Leong
NEW YORK, July 8 U.S. Treasuries prices rallied
on Tuesday as investors raised stakes in bonds because of stock
market losses ahead of corporate earnings, and overseas trade
data that fueled worries about global economic growth.
U.S. government debt yields fell for a second day on the
notion that last week's report showing hefty job gains in June
was not strong enough to spur the Federal Reserve to raise
short-term interest rates before the second half of 2015,
analysts and traders said.
"The weak wage component offset the stronger-than-expected
headlines, so there's nothing to set off the Fed for an earlier
rate hike," said Charles Retzky, director of futures sales at
Mizuho Securities USA in Chicago.
Minneapolis Fed President Narayana Kocherlakota said the
drop in unemployment is welcomed, but the labor market still has
a long way to go before the Fed has reached its goals, including
achieving a 2 percent inflation target. He added inflation would
likely average below 2 percent for the next four years.
This dovish view helped the bond market to hold its gains,
driving longer-dated yields further below two-month peaks set on
Thursday during an initial bond market sell-off in reaction to
the June payrolls data.
The benchmark 10-year Treasuries yield last
traded at 2.565 percent, down 5 basis points from Monday, while
the yield on 30-year bonds fell nearly 6 basis
points to 3.380 percent.
On Wall Street, major stock indexes sagged with the Standard
& Poor's 500 index falling 0.7 percent.
Foreign demand for higher-yielding Treasuries also stoked
the fall in yields as disappointing German economic data fed
expectations the European Central Bank would resort to
quantitative easing and lower rates to stimulate the regional
A surprise drop in U.K. factory output raised the hope that
the Bank of England might delay plans to increase rates in early
2016, spurring a drop in Gilt yields.
"The bond market is taking its cue (partly) from Europe,"
said Jeffrey Kleintop, chief market strategist with LPL
Financial at a presentation with reporters here. He added the
recent disappointing data on Europe would likely help keep a lid
on a significant rise in U.S. yields.
The German government said earlier that the euro zone's
biggest economy posted larger-than-forecast drops in exports and
imports in May, while data showed British factory production in
May suffered the biggest fall since January 2013.
The rally in the U.S. bond market was felt at a $27 billion
three-year note auction, the first part of this week's $61
billion in fixed-rate supply, selling at a yield of 0.992
percent, the highest in over three years.
Separately, the Fed bought $1.067 billion in bonds due in
2036 to 2043, part of its planned $19 billion Treasuries
purchases in July.
(Reporting by Richard Leong; Editing by Meredith Mazzilli and