Yields jump on US manufacturing data, hawkish policy bets

NEW YORK: US Treasury yields rose on Monday, with two-year yields touching their highest in more than eight years after US manufacturing data boosted expectations that the Federal Reserve would raise interest rates again this year as other central banks shift toward tighter monetary policy.

The Institute for Supply Management (ISM) said its index of national factory activity rose to 57.8 last month from 54.9 in May. Economists polled by Reuters had expected a reading of 55.2.

The expansion in manufacturing, which accounts for roughly 12 percent of the overall US economy, combined with hawkish comments last week from the heads of the European Central Bank and the Bank of England to pressure yields higher.

Analysts also said traders were selling Treasuries in anticipation of Friday's US June employment report, which could push yields higher if jobs and wage growth beat expectations. Economists polled by Reuters expect US employers to have added 179,000 jobs last month.

"The remarks from last week from central bankers and the ISM data from today help continue to pressure rates higher, and if we do get a solid number on Friday, that could keep the sell-off going," said Gennadiy Goldberg, an interest rate strategist at TD Securities in New York.

Short-dated US Treasury yields, which are considered most sensitive to Fed rate policy, surged. Two-year yields touched 1.426 percent to mark their highest since early June 2009, while three-year yields touched their highest in more than three months of 1.595 percent.

Benchmark 10-year yields hit a nearly seven-week high of 2.353 percent, while 30-year yields touched their highest in nearly three weeks of 2.873 percent. Five- and seven-year yields hit their highest since early May of 1.941 percent and 2.199 percent.

Analysts said trading volume was thin, with the US bond market closing early at 2 p.m. EDT (1800 GMT) ahead of the July 4 Independence Day holiday.

"(The manufacturing data) reinforces the risk of a tighter Fed," said Bruno Braizinha, interest rates strategist at Societe Generale in New York.

Braizinha added that since expectations of another rate hike from the Fed had bottomed out in recent sessions, there was a greater risk of traders pricing in higher expectations of another Fed rate hike this year if Friday's employment report beats expectations.

A raft of weak US economic data, including soft inflation readings, had reduced expectations of another rate rise in recent weeks.