January 2, 2018 / 8:41 PM / in 2 months

TREASURIES-U.S. yields rise in step with Europe and as Wall St gains

    * ECB's Coeure sees chance bond buys will not be extended
    * Wall Street gains add upward pressure on bond yields
    * U.S. Treasuries gained 2.3 pct in 2017 vs 19.5 pct for S&P
500

    By Kate Duguid
    NEW YORK, Jan 2 (Reuters) - U.S. Treasury yields rose on
Tuesday on strong Wall Street gains and in line with European
government yields after a European Central Bank official said
the ECB's massive bond purchase program may not be continued
later this year.
    Benoit Coeure, the ECB board member who oversees the bank's
market operations, told Caixin Global, a Chinese financial
magazine, he sees "a reasonable chance" that the
2.55-trillion-euros stimulus program will not be extended when
it expires in September.
    "European bonds are weaker because of comments from Coeure,"
said Karl Haeling, vice president at Landesbank
Baden-Wurttemberg in New York. "You have a stronger stock
market." 
    Investors piled back into stocks at the start of 2018, after
Wall Street scored its strongest performance in four years in
2017, buttressed by steady economic growth, solid corporate
earnings and the most dramatic overhaul of the U.S. tax code in
30 years.
    U.S. government bonds produced a 2.3 percent
annual return last year, as low inflation offset three interest
rate increases from the Federal Reserve, according to an index
compiled by Bloomberg and Barclays. This compared with a 19.5
percent yearly gain for the S&P 500.
    At 3:01 p.m. (2001 GMT), the benchmark 10-year Treasury
yield was up 5 basis points at 2.460 percent
following a 2 basis-point dip last year.
    The five-year yield ended at 2.246 percent after
touching its highest level since April 2011 earlier in the day,
while the two-year yield retested a nine-year peak of
1.927 percent. 
    "Part of it is early-year optimism,” bolstered by
assessments of the effects of tax reform on stocks, said Aaron
Kohli, an interest-rate strategist with BMO Capital Markets in
New York. 
    But some of the optimism may simply reflect the new year.
“There’s a strong seasonal bias. Historically, 10-year
yields…tend to peak out in Q1,” Kohli added. 
    On the supply front, traders increased purchases of U.S.
three-month Treasury bills at a record-size auction on Tuesday
in a sign they expect Congress to reach a deal to raise the debt
ceiling by late March.
    Looking ahead, yields may be affected by the release of
Institute for Supply Management manufacturing data on Wednesday
as well as the release of minutes from the Federal Reserve's
December policy-setting meeting.
    Kohli said the manufacturing data could prove to be pivotal.
“The market is getting fairly optimistic about growth, and if
that doesn’t keep up that’s where you’ll see the nail in the
coffin for higher yields,” he said. 
January 2 Tuesday 3:07PM New York / 2007 GMT
                               Price                  
 US T BONDS MAR8               151-28/32    -1-4/32   
 10YR TNotes MAR8              123-180/256  -0-88/25  
                                            6         
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             1.3875       1.4114    0.020
 Six-month bills               1.5325       1.5655    0.031
 Two-year note                 99-232/256   1.9231    0.032
 Three-year note               99-156/256   2.012     0.036
 Five-year note                99-108/256   2.2481    0.037
 Seven-year note               99-48/256    2.3768    0.044
 10-year note                  98-44/256    2.4597    0.049
 30-year bond                  98-228/256   2.805     0.064
                                                      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap        18.00        -0.50    
 spread                                               
 U.S. 3-year dollar swap        18.00        -0.75    
 spread                                               
 U.S. 5-year dollar swap         3.00        -0.50    
 spread                                               
 U.S. 10-year dollar swap       -2.50        -1.00    
 spread                                               
 U.S. 30-year dollar swap      -21.50        -1.00    
 spread                                               
 
    

 (Reporting by Kate Duguid; Additional reporting by Richard
Leong; Editing by Susan Thomas and Leslie Adler)
  
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