US Treasury yields rose on Monday with the 10-year yield hitting one-week highs as investors pared safe-haven holdings of lower-risk government debt due to fading fears about political turmoil in Italy and Spain. A robust US payrolls report in May renewed an upbeat outlook for faster domestic growth and inflation, rekindling expectations the Federal Reserve may consider raising rates three more times in 2018, analysts said.
Still, ongoing trade tensions kept demand for Treasuries strong enough to keep US yields well below multi-year peaks reached more than two weeks ago. "People can now look at Italy and Spain and think, 'It's not the best situation, but it's not terrible either,'" said Stan Shipley, a strategist at Evercore ISI, in New York. "In the meantime, the US is looking pretty good."
Benchmark 10-year Treasury notes' yield was up 4.0 basis points at 2.935 percent after touching the highest in a week. Last Tuesday, it tumbled to a seven-week low at 2.759 percent on record volume in the futures market. Two-year yield rose to 2.508 percent, up 4.0 basis points on renewed expectations the Fed may raise overnight borrowing costs three more times by year-end to a target range of 2.25-2.50 percent.
The Federal Open Market Committee, the Fed's policy-setting group, is widely expected to raise short-term interest rates for a second time in 2018 at its policy meeting next week. It last hiked rates in March to 1.50-1.75 percent. Bets on faster rate hikes had fallen last week on worries about Europe before they were revived by a US government report showing a stronger-than-forecast 223,000 jobs increase last month. Hourly wages grew 0.3 percent last month, suggesting inflation was creeping higher.
Italy averted a repeat election with a new anti-establishment government sworn in on Friday following months of political turmoil. Spain has a new prime minister in Pedro Sanchez, but his minority government remains fragile and must address the revived independence campaign in Catalonia.
The thorny political predicaments in euro zone's third and fourth largest economies are far from over, analysts said. Moreover, strong US growth seen so far in the second quarter is threatened by the possibility of a trade war with its allies, Canada, Mexico and the European Union.