NEW YORK: US Treasuries yields approached two-year highs on Tuesday after data in Europe showed that the region's economy is picking up steam, while US retail sales were also firm, providing further evidence the economic recovery is continuing to gain strength.
Treasuries weakened along with German bunds after German analyst and investor sentiment climbed more than expected in August and data showed British house prices rising at the fastest pace in seven years.
US government bonds extended price losses and yields hit session highs after a gauge of US consumer spending rose in July at its fastest pace in seven months.
"The European market is the bigger story today," said Tom Tucci, head of Treasuries trading at CIBC in New York. "With the European market being as weak as it is, there is going to be continued pressure here."
The Federal Reserve bought inflation-linked debt on Tuesday, instead of its more regular nominal Treasuries purchases, reducing support for the market.
The Fed purchased $1.413 billion in Treasury Inflation-Protected Securities (TIPS) due from 2040 to 2043 as part of its ongoing purchase program.
Benchmark 10-year notes fell 25/32 in price to yield 2.72 percent, up from 2.62 percent late on Monday. The 10-year yield has retreated from a two-year high of 2.755 percent on July 8, but is up from the bottom of the recent range of 2.46 percent on July 17.
Thirty-year bonds dropped 1-07/32 in price to yield 3.76 percent, up from 3.68 percent late on Monday. The bonds yields traded at a two-year high of 3.79 percent on July 10.
Traders are closely focused on data for signs of economic momentum as they anticipate that the Federal Reserve will start reducing its $85 billion monthly bond purchases in September if the economy is gaining traction.
The release next Wednesday of the minutes from the Fed's July meeting is likely to be the next focus as investors look for new clues on whether Fed officials were adopting a more cautious outlook on the economy.
"There was a divide that came out of that meeting. Some people thought it was relatively dovish, which I didn't see. Maybe we will get some internals about what they were thinking about tapering," said CIBC's Tucci.
The minutes will be followed by the Fed's annual monetary policy conference in Jackson Hole, Wyoming, on August 22-24.
The most important economic indicator in coming weeks, meanwhile, and potentially the only one that might alter the Fed's course, will be the release of the August jobs data on Sept. 6, before the Fed's Sept. 17-18 meeting.
Volatility is expected to pick up in September as the potential pullback in bond purchases will coincide with a number of other major events, including German elections and the US debt ceiling.
"We think we're going to get close to the debt ceiling shortly before the mid-September tax date; the rhetoric around the debt ceiling has hardened," said Michael Cloherty, head of US rates strategy at RBC Capital Markets in New York.
At the same time, derivatives, including interest rate swaps, which are used to hedge Treasuries and other bonds, will be mandated to trade on electronic trading platforms at the beginning of October. The shift may temporarily reduce liquidity as participants adapt to the change.
"During the transition period everyone is trying to work out how to trade in this new structure," said Cloherty.
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