US yields jump on worries ECB might wind down stimulus

NEW YORK: US Treasury yields rose on Wednesday, with the 10-year yield hitting a 1-1/2-week high on worries that the European Central Bank would end the expansion of its massive bond purchase program this year.

Jitters that the ECB could signal its desire to wind down massive stimulus as early as next week triggered a broad sell-off in German Bunds and other European government debt, which spilled over to the Treasuries sector, analysts said.

Political turmoil in Italy and Spain has spurred speculation ECB policy-makers may back away from winding down their 2.55 trillion euro ($3 trillion) program in September.

Comments from ECB chief economist Peter Praet undercut that notion, suggesting the central bank is growing more confident inflation is rising enough to allow a tapering of bond purchases.

Jens Weidmann, head of Germany's Bundesbank, said expectations of ECB's slowing quantitative easing (QE) before year-end are plausible.

ECB policy-makers are scheduled to meet on Thursday, June 14.

"The ECB is effectively calling its next meeting 'live' that would give a better timetable about tapering its QE program. Overall that's hawkish," said Timothy High, interest rates strategist at BNP Paribas in New York.

In mid-afternoon trading, the benchmark 10-year Treasury yield was up nearly 6 basis points at 2.975 percent after touching a 1-1/2 week high, while two-year yields  increased over 3 basis points to 2.524 percent.

The 10-year German Bund yield climbed 10 basis points for its biggest one-day rise in nearly a year to 0.470 percent, while Italian 10-year yields jumped almost 18 basis points to 2.941 percent, its highest in a week, Reuters data showed.

News that the US trade deficit fell to a seven-month low in April strengthened views that the Federal Reserve would raise short-term interest rates at least twice more this year, adding upward pressure on yields.

"We are seeing pressure from the ECB and certain amount of US economic strength," said Justin Hoogendoorn, head of fixed income strategy at Piper Jaffray & Co. in Chicago.

Interest rates futures implied traders saw a 94 percent chance the US central bank would raise overnight borrowing costs by a quarter point to 1.75-2.00 percent next Wednesday, CME Group's FedWatch program showed.

Moreover, a heavy supply of corporate bonds this week has spurred sales of lower-yielding Treasuries, analysts said.

So far this week, companies raised about $26 billion in the investment-grade bond market, according to IFR, a unit of Thomson Reuters.