US bond yields climb on ECB's plan

US Treasury yields rose on Thursday in line with their European counterparts after the European Central Bank prolonged its bond purchase program, as expected, but stunned traders by scaling back on how much bonds it will buy each month. The ECB said it would trim its monthly pace of bond purchases to 60 billion euros from 80 billion euros, starting next April. The reduced pace of purchases will last into December 2017, three months longer than what some analysts had forecast.
ECB President Mario Draghi, however, said the unexpected move was not an outright winding-down of the central bank's quantitative easing (QE) program, as policymakers would like to see evidence of a sustained pickup in inflation in Europe. "It's not what the market had expected and hoped for, but he left the door open," said Kevin Giddis, head of fixed income capital markets with Raymond James.
Draghi hinted the ECB could further extend bond purchases and/or increase its monthly purchase pace in the event the euro zone economy faltered. Traders had worried the central bank would signal a clear path to wrap up its asset purchase program, propelling bond yields in Europe and the rest of the world higher. "This isn't going to last forever, but they are saying we are going to keep doing this until inflation comes back," Larry Milstein, head of US government and agency trading at R.W. Pressprich & Co in New York, said, referring to the ECB's QE plans.
The benchmark 10-year Treasury note's yield was up over 4 basis points at 2.393 percent, retreating from a session high of 2.427 percent. The 10-year yield held below the 2.492 percent level reached on December 1, which was its highest since July 2015, according to Reuters data. The German 10-year Bund yield was up 3 basis points at 0.379 percent.
ECB's bond purchase changes came less than a week before the Federal Reserve's policy meeting next Tuesday and Wednesday. Interest rates futures implied traders saw a 98 percent chance the US central bank would raise interest rates by a quarter point next week and roughly a 50 percent chance it would raise rates by at least another quarter point by June 2017, CME Group's FedWatch program showed. Prior to the Fed's rate decision, the Treasury Department will sell $24 billion of three-year notes and $20 billion in 10-year notes next Monday and $12 billion of 30-year bonds next Tuesday.