LONDON: US benchmark 10-year yields dipped in Europe on Tuesday after they fell short of a seven-month high in the previous session, but they were expected to soon re-test that level as optimism about the economic outlook ran high.
Ten-year yields have risen substantially in the past week and hit their highest levels in 4-1/2 months at just below 2.40 percent on Monday. They were last 1.8 basis points lower at 2.3573 percent. If they break 2.42 percent they would hit their highest since August 2011.
The sharp move was fueled by upbeat economic data and fading expectations of long-term loose monetary policy in the United States. Dallas Federal Reserve President Richard Fisher said on Monday there was no need for more liquidity injections.
"We've hit some guys' near term target at 2.40 (percent) in yields," one trader said.
"But the market is prepared to push yields higher. The psychology has shifted. Guys want to sell rallies. The 2.40 (yield level) - seems like the market wants to take a run at it. We got too close last night to not go through it."
Chartists agreed the rise in yields had room to be extended. Societe Generale technical analysts expected yields to test 2.42 percent, "or even rise to the upper end of the tentative rising channel coming at 2.54 percent this week".
US Treasury markets will keep an eye on developments in Europe as well, with any sign of worsening in the euro zone crisis likely to increase demand for safe-haven assets.
The next crunch point for the euro zone is Italian Prime Minister Mario Monti's negotiations with trade unions later on Tuesday on a package of labour reforms - seen as key to restoring growth in the heavily indebted country.
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