U.S. Two-Year Treasury Yield Highest Since November 2008 on Strong Manufacturing Data

Prices of U.S. government bonds fell on Monday, sending the yield on the two-year Treasury note to the highest level in more than eight years, as the latest sign of solid growth in the U.S. manufacturing industry sapped demand for haven assets.

The release may bolster the Federal Reserve's plan to raise short-term interest rates one more time before the end of this year.

Monday's price slides added to the bond market's losing streak last week after hawkish comments from policy makers at the European Central Bank, the Bank of England and the Bank of Canada fueled bond investors' worries over a pivot toward tightening monetary policy in the developed world.

In recent trading, the yield on the two-year Treasury note was 1.410%, according to Tradeweb. It settled at 1.385% on Friday, which was the highest close since June 2009.

Yields rise as bond prices fall. Yields on short-term Treasurys are highly sensitive to the Fed's interest rate policy.

The yield on the benchmark 10-year Treasury note was 2.341% recently Monday, according to Tradeweb. It settled at 2.298% Friday which was the highest close since May 16.

Trading may be thinner than usual Monday ahead of a public holiday, which may exaggerate part of the price move, said some bond traders. The U.S. bond market will be closed at 2 p.m. Monday and remain shut Tuesday for the Independence Day holiday.

Manufacturing data released Monday from China, the eurozone and the U.S. pointed to improving global economic outlook and supported some central bankers' view to normalize their interest rate policy.

A gauge of manufacturing in China beat market expectations and a similar gauge in the eurozone reached the highest level since 2011. In the U.S., the monthly manufacturing reading from the Institute for Supply Management rose to 57.8 last month from 54.9 in May, beating economists' forecasts.

Last week, the 10-year Treasury yield rose by 0.15 percentage point, though it is still below the 2.446% traded at the end of last year.

Large and unconventional monetary stimulus via asset purchases by the ECB and the Bank of Japan have played a big factor driving global government bond yields to historically low levels over the past years. Bond investors are concerned that the value of their holdings would fall as central banks reduce their support for the bond markets.

Global government bond yields remain at very low levels. Government bonds in the developed world have been jolted by a number of selloffs in past years, but they have short-lived.

Central bank officials are mindful of the taper tantrum in the Treasury bond market during the summer of 2013. The 10-year Treasury rose sharply as comments from then-Fed Chairman Ben Bernanke about a possible cut in bond buying caught investors off guard. Higher Treasury yields rippled into many other fixed-income markets, caused a record pace of outflows from bond funds and tightened financial conditions for the U.S. economy.

"I think the central banks are very cognizant of the fact that they have forced investors into very low yields and they want to do all they can to avoid a sloppy selloff that will create big losses," said Thomas Roth, executive director in the rates trading group at MUFG Securities Americas Inc.

This week's datapoints may help decide whether the selloff has room to run, say analysts.

The key datapoint is the nonfarm employment report due Friday morning. Investors not only zero in on the job growth and the unemployment rate figures, but also a gauge of wage inflation in the report.

Bond investors and economists have been confounded by the disconnect in the labor market -- despite a big decline in the unemployment rate that suggests the labor market approaches full employment, wage growth has been relatively tepid. Other inflation readings over the past few months, including the consumer-price index, have softened and have fallen below the Fed's 2% target again.

Fed Chairwoman Janet Yellen said last month that recent inflation readings could be noisy and that a robust labor market may eventually push inflation higher. But some money managers say Ms. Yellen's inflation outlook could be wrong, and if inflation pressure continues to ease, it may curtail the Fed's pace in tightening policy.

Easing inflation pressure also makes long-term government bonds more appealing to buy. Inflation chips away investors' purchasing power obtained from their bond investments and is seen by investors as a big threat to long-term government debt.

Monday's U.S. manufacturing release showed inflation pressure pulled back. The ISM Prices Paid reading fell to 55.0 in June from 60.5 in May.

"For now, the risk of a large rise in bond yields is low," said Jack Flaherty, money manager at GAM Holdings AG. "But four months from now, it is hard to predict."

Write to Min Zeng at min.zeng@wsj.com

The U.S. government bond market on Monday extended last week's selloff, sending the yield on the two-year Treasury note to the highest level in more than eight years.

The yield on the benchmark 10-year note rose above 2.3% and settled at the highest level since May 11. Yields rise as bond prices fall.

Demand for haven bonds pulled back after a report showed that U.S. manufacturing activity expanded last month at the fastest pace in nearly three years. Analysts say the results lift optimism about economic growth picking up after a soft patch during the first quarter, which bolsters the Federal Reserve's case to raise interest rates one more time before the end of this year.

The report "confirms the Fed's general view that any softness in the U.S. economy will work itself out," said Jim Vogel, market strategist at FTN Financial.

Bond yields jumped last week after months of slides, as hawkish comments from policy makers at the European Central Bank, the Bank of England and the Bank of Canada fueled bond investors' worries over a pivot toward tightening monetary policy in the developed world.

Mr. Vogel said that for the higher yield momentum to continue, upcoming data need to show stronger growth and higher inflation.

Reports on U.S. private-sector employment and the health of the service industry are both due Thursday, while the monthly U.S. nonfarm employment report is released Friday morning. Investors not only zero in on the job growth figure in nonfarm payrolls, but also a gauge of wage inflation in the report.

The yield on the two-year Treasury note settled at 1.414% on Monday, compared with 1.385% Friday. It was the yield's highest close since November 2008.

Yields on short-term Treasurys are highly sensitive to the Fed's interest rate policy. The two-year yield has more than doubled the level it traded at a year ago as the Fed has raised short-term interest rates three times since last December.

The yield on the benchmark 10-year Treasury note settled at 2.352%, compared with 2.298% Friday.

The U.S. bond market closed at 2 p.m. Monday and remains shut on Tuesday in observance of Independence Day. Some traders said trading was thinner than usual before the holiday, which may have exaggerated part of the bond price slides.

The Dow Jones Industrial Average hit a fresh intraday record high on Monday, a sign of improved appetite for riskier assets.

U.S. bank shares were among the winners on Monday, boosted partly by a rise in the 10-year Treasury note's yield premium relative to that on the two-year note.

The premium was 0.938 percentage point Monday, the highest since May 26. A higher premium is known as a steepening yield curve, which tends to be good for banks which borrow short-term money and lend out cash longer term. The wider the yield spread, the stronger the profit margin outlook for banks.

A steepening curve would also be welcome by Fed policy makers because it is typically interpreted as a sign of rising optimism toward stronger growth and higher inflation. A falling premium is known as a flattening yield curve which tends to flag worrisome signals about growth. The curve had flattened earlier this year and remains close to the flattest level since 2007.

Manufacturing data released Monday from China, the eurozone and the U.S. pointed to an improving global economic outlook and supported some central bankers' view to normalize their interest-rate policy.

Last week, the 10-year Treasury yield rose by 0.15 percentage point, though it is still below the 2.446% traded at the end of last year.

Large and unconventional monetary stimulus via asset purchases by the ECB and the Bank of Japan have played a big factor driving global government bond yields to historically low levels in recent years. Bond investors are concerned that the value of their holdings could fall as central banks reduce their support for the bond markets.

Write to Min Zeng at min.zeng@wsj.com

(END) Dow Jones Newswires

July 03, 2017 15:36 ET (19:36 GMT)