BOND REPORT: Treasury Yields On Track For Largest Weekly Gains Since March

By Sunny Oh and Saumya Vaishampayan Features Dow Jones Newswires

More central banks may be following the Federal Reserve's hawkish lead, sending bond yields skyrocketing

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Treasury yields have broadly risen after a batch of mixed data offered some optimism to investors hoping for an improvement to second-quarter growth, but demonstrated the difficulty of anticipating the economy's near-term direction.

The 10-year Treasury yield rose 1.8 basis point to 2.285%, contributing to a 14 basis point jump over the past week. The 30-year bond, or the long bond, gained 1.7 basis point to 2.831%, while the 2-year note was relatively unchanged at 1.370%. Bond prices move up when yields go down; one basis point is one hundredth of a percentage point.

The Commerce Department reported (http://www.marketwatch.com/story/consumer-spending-is-weak-in-may-but-so-is-inflation-2017-06-30) that consumer spending had barely risen 0.1% in May, while the PCE index, the Federal Reserve's preferred inflation gauge, fell 0.1%, the second time its dropped in three months. Treasury yields nonetheless added to their steep climb over the week as analysts said traders had already braced themselves for a weak inflation reading.

"The market was setting up for a slight disappointment," said Aaron Kohli, a fixed-income strategist, at BMO Capital Markets.

And even though the main figures were discouraging to those looking for growth in spending amid anemic inflation in the past few months, the rise in consumption, stripping out for changes in consumer prices, added evidence to the case for a second-quarter economic rebound, said Jim O'Sullivan, chief U.S. economist for High Frequency Economics.

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Later Friday, the Chicago Business Barometer, a survey of economic conditions in the Midwest, showed a jump to 65.7 in June from 59.4 (http://www.marketwatch.com/story/chicago-pmi-climbs-to-657-in-june-highest-since-2014-2017-06-30) in the previous month, the highest levels since May 2014. The highlighted the divergence between so-called "soft" sentiment data and "hard" economic data that has befuddled economists worried whether the third longest economic expansion in history will continue to have legs.

The relatively quiet market moves helped to cap off a tumultuous week for global bond markets thrown into a panic by the coordinated statements of central bankers on the likelihood of tighter policy by the end of the year. Yields for European government paper had soared midweek after European Central Bank President Mario Draghi, Bank of England Gov. Mark Carney and Bank of Canada Gov. Stephen Poloz hinted that the Western economies had strengthened enough to scale back monetary stimulus.

In Europe, the selloff had abated for the day, with German, French and British bonds showing little change.

See: Consumer spending is weak in May, but so is inflation (http://www.marketwatch.com/story/consumer-spending-is-weak-in-may-but-so-is-inflation-2017-06-30)

But the panic appeared to spread to Asia on Friday, pushing the yield on Japan's benchmark 10-year government bond to 0.083%, its highest levels since March 15.

Central banks like the ECB, Bank of Japan and Federal Reserve bought massive amounts of bonds as they tried to shore up their economies in the wake of the financial crisis, which helped to drive yields to extreme lows. The Fed stopped buying bonds in 2014 and has since started raising short-term rates. The recent remarks from Draghi (http://www.marketwatch.com/story/what-happened-to-mario-draghis-silver-tongue-2017-06-28) and others suggest more central banks might be following suit, leaving investors increasingly on the lookout for clues about the timing of such a shift.

"This [selloff] can escalate if more central banks are sounding hawkish," said Irene Cheung, a senior strategist for Asia at ANZ in Singapore. The Bank of Korea said last week it could adjust its easing stance if the economic recovery continues. The Reserve Bank of Australia is scheduled to meet next Tuesday.

Read:Central banks set up investors for a long, hard road back to 'normal' (http://www.marketwatch.com/story/investors-face-a-long-hard-road-back-to-normal-2017-06-29)

And see:Here's why the stock market is spooked by central bankers (http://www.marketwatch.com/story/heres-why-the-stock-market-is-spooked-by-central-bankers-trump-agenda-delays-2017-06-29)

(END) Dow Jones Newswires

June 30, 2017 14:35 ET (18:35 GMT)