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imageNEW YORK: US Treasury yields surged on Tuesday after Japan unveiled fiscal stimulus measures, dampening demand for US government debt and sending long-dated US yields to their highest levels in more than a week.

Japanese Prime Minister Shinzo Abe's Cabinet approved $132 billion in fiscal measures, sending Japanese government bond yields higher. But even before the announcement, those bonds saw their worst sell-off in more than three years as investors feared the Bank of Japan (BOJ) may ratchet back the pace of its aggressive government bond buying.

Higher Japanese government bond yields removed a pillar of support for US Treasuries, analysts said, since a key source of investor demand for US Treasuries has been their higher yields relative to low or negative yields elsewhere.

Japan's fiscal stimulus is seen as positive for growth, which is negative for safe-haven government bonds, said Priya Misra, head of global rates strategy at TD Securities in New York.

Japan's government will issue several billion dollars of 40-year bonds as soon as September to fund the new stimulus measures, two people with direct knowledge of the matter said. The announcement of the new bond issuance also pushed yields higher, Misra said.

"There's a general appreciation that monetary policy is at its limits," Misra said, referring to policies such as central bank bond purchases, which differ from fiscal stimulus in that they suppress rather than lift yields.

US 30-year yields rose the most among US Treasuries and hit 2.332 percent, their highest level since July 21, while prices on the bonds fell by more than two full points. Benchmark 10-year yields hit a six-day high of 1.573 percent.

"There is definitely some siphoning off of demand to other

markets, including the US, because of the BOJ," said David Coard, head of fixed income sales and trading at Williams Capital in New York.

He said US Treasury yields could remain at elevated levels until Friday's US employment report for July, which could sway traders' views on whether the Federal Reserve could raise interest rates in September or December.

US 10-year Treasury yields were last up more than four basis points on the day at 1.542 percent. Short-dated yields also rose, with three-year yields last up nearly two basis points on the day at 0.793 percent.

Copyright Reuters, 2016

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