By Joseph Adinolfi, MarketWatch

European yields rise after strong PMI data

Treasury yields turned flat on Tuesday, erasing an earlier rise, after a new poll showed far-right candidate Marine Le Pen's lead's widening in the coming French presidential election.

The poll, which was conducted by communications firm Elabe for French TV station BFMTV and magazine L'Express, showed Le Pen's lead increasing by as much as 2 percentage points from a prior poll published on Feb. 8.

The poll affected markets from bonds, to stocks, to metals (http://www.marketwatch.com/story/marine-le-pens-lead-widens-in-latest-electoral-poll-2017-02-21) by triggering a pick up in bidding on assets perceived as havens, said Tom di Galoma, managing director for Treasury trading at Seaport Global.

"Marine Le Pen is an anti-immigration, right-wing candidate who is gaining momentum to become the next president of France," di Galoma said. "The poll seems to be driving Treasury prices higher."

Perhaps equally as troubling were signs that Emmanuel Macron, the candidate who's seen as having the better chance of defeating Le Pen in the second round of voting, fell behind conservative candidate François Fillon, said Peter Chatwell, head of Europeanrates strategy at Mizuho International PLC.

Focus on elections in Europe, specifically France, are centered on the fear that rising populist victories could lead to several countries abandoning Europe's trade bloc, which could destabilize the eurozone and its shared currency, the euro.

The yield on the 10-year Treasury note was flat at 2.418%, while the yield on the two-year Treasury note rose two basis points to 1.207%. The yield on the 30-year bond was flat at 3.025%. Bond yields rise as prices fall.

European bond yields trimmed earlier gains following the release of the poll.

Treasury yields had climbed early in the U.S. trading day following hawkish comments from Philadelphia Federal Reserve Bank President Patrick Harker, who said over the weekend that he would likely support raising interest rates at the central bank's upcoming March meeting if he sees more evidence that economic growth and inflation are accelerating.

The yield on the 10-year German bund was flat at 0.297%, while the yield on the 10-year French bond rose 3.8 basis points to 1.092%. The yield on the 10-year Italian bond rose 4.4 basis points to 2.223%.

Yields rose early Tuesday London Time after the eurozone composite purchasing managers index for February came in at its highest level since April 2011, a sign that economic growth is picking up, according to a research note from Capital Economics.

Over the past few weeks, Federal Reserve Chairwoman Janet Yellen and a host of other Fed officials have intimated that an interest-rate increase at the policy-setting Federal Open Market Committee's meeting on March 14-15 remains on the table. Their remarks contrasted with the perceived dovish tone from the central bank's most recent monetary policy outlook, released in January.

However, Fed-funds futures, which are used by investors to place bets on the future path of interest rates, are presently pricing in a less than 20% chance of a March hike, according to data provided by the CME Group.

Cleveland Fed President Loretta Mester also struck a hawkish tone, meaning she endorsed a path of raising rates sooner than later, in remarks delivered over the weekend. But her words carried less weight because she's not a voting member of the central bank's interest-rate setting committee this year.

But the increase in yields over the past week suggests that "people are starting to believe that March is back on the table," said Kevin Nicholson, chief market strategists at RiverFront Investment Group.

On the policy front, recent reports suggest that President Donald Trump's efforts to pass corporate tax reform have met with heavy opposition from retail lobbying groups and some Republican senators, (https://www.wsj.com/articles/as-tax-debate-heats-up-lawmakers-struggle-to-think-of-a-plan-b-1487327400) according to a Friday report in The Wall Street Journal.

Treasury yields shot higher after Trump's unexpected electoral victory partly due to the expectation that his economic policies would cause inflation to accelerate. Typically, when investors expect prices to rise during the lifespan of a bond, they demand a higher yield to offset them.

(END) Dow Jones Newswires

February 21, 2017 13:13 ET (18:13 GMT)

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