Yellen spoke before the Senate Banking Committee
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Government bonds on Thursday sold off across major developed markets, driving yields higher, as investors anticipated further evidence of a tapering of longstanding easy-money policies that have supported prices of sovereign paper.
The Wall Street Journal reported that European Central Bank President Mario Draghi is set to speak at a prominent conference of central bankers in Jackson Hole, Wyo., for the first time in three years, where he is expected to signal optimism in the eurozone economy and reduced need for stimulus.
The German 10-year benchmark bond, or the bund, has risen as much as 5 basis points since the news broke, while the French 10-year government bond has climbed more than 7 basis points. Bond prices move inversely to yields.
The selloff highlighted the close relationship between global bond markets as investors find it easier to arbitrage differences in interest rates across the world, as central bankers begin efforts to normalize their monetary policies.
Draghi at the coming Jackson Hole event is expected to signal a pullback of its EUR60 billion ($68.43 billion) bond-buying program, less than two weeks before the ECB's September policy meeting, the WSJ reported.
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European interest rates have remained depressed as a price-insensitive ECB snapped up government bonds and corporate debt to meet its quota for monthly purchases.
"The ECB has been buying every month, they were supposed to buy by the end of the year, potentially longer if needed. But it finally looks like we're seeing the light at the end of the tunnel. We're not going to get quantitative easing forever," said Larry Milstein, head of government and agency trading at R.W. Pressprich & Co.
Draghi's return to Jackson Hole is symbolic, as the mountain resort was where he first announced the ECB's plans to unleash quantitative easing on European bond markets. Former Fed Chairman Ben Bernanke and other central bankers have also used the conference to declare shifts in U.S. monetary policy.
Domestically, yields also climbed. The 10-year treasury yield rose 2.3 basis points to 2.348%. The two-year note's yield rose 1.2 basis points to 1.363%, while the 30-year bond gained 3 basis points to 2.924%.
Fed Chairwoman Janet Yellen, in her second day of Capitol Hill testimony on Thursday, repeated her expectations in front of Senate Banking Committee for a "gradual" increase in interest rates as factors holding down the neutral policy stance, the long-term resting point for the fed-funds rate, abate.
See: Live blog and video of Yellen's testimony before senate panel (http://blogs.marketwatch.com/capitolreport/2017/07/12/live-blog-and-video-of-yellens-testimony-before-house-panel/)
More senior Fed officials have begun to align with Yellen's dovish stance. Dallas Fed President Robert Kaplan, a voting member and a centrist, questioned the need for additional rate increases (http://www.marketwatch.com/story/dallas-feds-kaplan-becomes-third-fomc-member-to-question-need-for-more-rate-hikes-2017-07-13) without some progress toward the Fed's 2% long-term inflation target. On Tuesday, Fed Gov. Lael Brainard said she wanted to monitor economic data before settling on whether another interest-rate hike was needed.
But some investors feel the spate of dovish comments does not jeopardize the chance of a December rate hike. Bryce Doty, senior portfolio manager at SIT Investment Associates said the Fed had to shrink its portfolio of holdings before raising the Fed funds rate, or it would risk paying too much on the so-called interest on excess reserves (IOER) that banks park at regional Federal Reserve Banks.
"What they're trying to do is set up the balance sheet reduction, and it looks like they're going full steam ahead. They need to get that down before they raise rates," he said.
On the economic data front, the number of Americans filing for first-time unemployment benefits slipped 3,000 to 247,000 last week (http://www.marketwatch.com/story/us-jobless-claims-drop-3000-to-247000-2017-07-13), but the four-week initial jobless claims average, the less volatile gauge, rose 2,250 to 245,750. Meanwhile, producer prices rose 0.1% (http://www.marketwatch.com/story/us-wholesale-inflation-up-slightly-in-june-but-no-longer-rising-rapidly-ppi-shows-2017-07-13), yet the rapid pace of growth in the 12-month PPI slowed to 2% from 2.4%. Diminishing inflation pressures amid a tight labor market could cast doubt on the Fed's plans to tighten monetary policy.
The Treasury Department auctioned off $12 billion of 30-year bonds at noon, but attracted lackluster demand.
(END) Dow Jones Newswires
July 13, 2017 16:17 ET (20:17 GMT)