U.S. Two-Year Treasury Yield Highest Since November 2008 on Strong Manufacturing Data

By Min Zeng Features Dow Jones Newswires

The U.S. government bond market on Monday extended last week's selloff, sending the yield on the two-year Treasury note to the highest level in more than eight years.

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The yield on the benchmark 10-year note rose above 2.3% and settled at the highest level since May 11. Yields rise as bond prices fall.

Demand for haven bonds pulled back after a report showed that U.S. manufacturing activity expanded last month at the fastest pace in nearly three years. Analysts say the results lift optimism about economic growth picking up after a soft patch during the first quarter, which bolsters the Federal Reserve's case to raise interest rates one more time before the end of this year.

The report "confirms the Fed's general view that any softness in the U.S. economy will work itself out," said Jim Vogel, market strategist at FTN Financial.

Bond yields jumped last week after months of slides, as hawkish comments from policy makers at the European Central Bank, the Bank of England and the Bank of Canada fueled bond investors' worries over a pivot toward tightening monetary policy in the developed world.

Mr. Vogel said that for the higher yield momentum to continue, upcoming data need to show stronger growth and higher inflation.

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Reports on U.S. private-sector employment and the health of the service industry are both due Thursday, while the monthly U.S. nonfarm employment report is released Friday morning. Investors not only zero in on the job growth figure in nonfarm payrolls, but also a gauge of wage inflation in the report.

The yield on the two-year Treasury note settled at 1.414% on Monday, compared with 1.385% Friday. It was the yield's highest close since November 2008.

Yields on short-term Treasurys are highly sensitive to the Fed's interest rate policy. The two-year yield has more than doubled the level it traded at a year ago as the Fed has raised short-term interest rates three times since last December.

The yield on the benchmark 10-year Treasury note settled at 2.352%, compared with 2.298% Friday.

The U.S. bond market closed at 2 p.m. Monday and remains shut on Tuesday in observance of Independence Day. Some traders said trading was thinner than usual before the holiday, which may have exaggerated part of the bond price slides.

The Dow Jones Industrial Average hit a fresh intraday record high on Monday, a sign of improved appetite for riskier assets.

U.S. bank shares were among the winners on Monday, boosted partly by a rise in the 10-year Treasury note's yield premium relative to that on the two-year note.

The premium was 0.938 percentage point Monday, the highest since May 26. A higher premium is known as a steepening yield curve, which tends to be good for banks which borrow short-term money and lend out cash longer term. The wider the yield spread, the stronger the profit margin outlook for banks.

A steepening curve would also be welcome by Fed policy makers because it is typically interpreted as a sign of rising optimism toward stronger growth and higher inflation. A falling premium is known as a flattening yield curve which tends to flag worrisome signals about growth. The curve had flattened earlier this year and remains close to the flattest level since 2007.

Manufacturing data released Monday from China, the eurozone and the U.S. pointed to an improving global economic outlook and supported some central bankers' view to normalize their interest-rate policy.

A gauge of manufacturing in China beat market expectations and a similar gauge in the eurozone reached the highest level since 2011. In the U.S., the monthly manufacturing reading from the Institute for Supply Management rose to 57.8 last month from 54.9 in May, the highest level since August 2014.

Last week, the 10-year Treasury yield rose by 0.15 percentage point, though it is still below the 2.446% traded at the end of last year.

Large and unconventional monetary stimulus via asset purchases by the ECB and the Bank of Japan have played a big factor driving global government bond yields to historically low levels in recent years. Bond investors are concerned that the value of their holdings could fall as central banks reduce their support for the bond markets.

"I think the central banks are very cognizant of the fact that they have forced investors into very low yields and they want to do all they can to avoid a sloppy selloff that will create big losses," said Thomas Roth, executive director in the rates trading group at MUFG Securities Americas Inc.

Write to Min Zeng at min.zeng@wsj.com

(END) Dow Jones Newswires

July 03, 2017 15:36 ET (19:36 GMT)