By Sunny Oh

Treasury yields headed higher Tuesday after European Central Bank President Mario Draghi hinted that the factors suppressing inflation would be short-lived, giving traders the impression that European policy makers intend to wind down their quantitative easing program by the end of the year.

European sovereign paper sold off on Draghi's remarks. The yield for the 2-year German government bond rose 6.3 basis points to -0.584%, the highest in a year. The spread between the German and U.S. 10-year government bonds narrowed to 1.83%, or 183 basis points, the tightest since November.

Yields and bond prices move in opposite directions. Treasurys took a cue from Europe.

The yield on the 10-year benchmark note rose the most among the key tenors by 6.6 basis points to 2.204%, the highest since the release of the Fed's policy statement on June 14.

The 2-year note's yield gained 1.6 basis point to 1.369%, while the 30-year bond yield rose jumped 5.6 basis points to 2.753%.

Draghi said a variety of factors were slowing the reflationary process but "are on the whole temporary and should not cause inflation to deviate from its trend over the medium term, so long as monetary policy continues to maintain the solid anchoring of inflation expectations," according to the text (https://www.ecb.europa.eu/press/key/date/2017/html/ecb.sp170627.en.html)of the speech.

Market participants read his comments as a signal that the central bank is looking past recent weak inflation numbers to set up for a tapering of its asset purchasing program. The ECB's quantitative easing program is scheduled to end in December. U.S. Treasury prices have been supported by low interest rates across the world as they offer relatively higher yields compared with the government debt of Japan and other developed countries.

"The surprising aspect of Draghi's comments is that he wasn't particularly concerned about inflation. Global deflation concerns might be overdone in Draghi's mind," said Marvin Loh, senior fixed income strategist at BNY Mellon.

Draghi's comments echoed those of Fed Chairwoman Janet Yellen after she attempted (http://www.marketwatch.com/story/slower-inflation-feds-yellen-not-convinced-2017-06-14)to downplay a recent raft of weaker-than-expected inflation numbers in the past few months to strengthen the case for continuing with its monetary tightening. But despite the widening economic recovery in the eurozone, he maintained the need for the ECB to stay accommodative.

See: Draghi hints ECB may start winding down QE (http://www.marketwatch.com/story/draghi-hints-ecb-may-start-winding-down-qe-2017-06-27)

"The danger that is the European bond market as the ECB gets deeper into its taper and it can single-handedly drag U.S. yields higher as they are today," said Peter Boockvar, chief market analyst for the Lindsey Group, in a note to clients.

Yellen, speaking in London on Tuesday, repeated her stance that ratesoverall would remain low for some time and would be raised gradually. She also mentioned that the Fed was watching inflation expectations. On the central bank's relationship with President Donald Trump's administration, Yellen said Trump respected the Fed's independence.

Traders eyed speeches from other central bankers as Tuesday's schedule for Fed speakers was especially busy. Philadelphia Fed President Patrick Harker, a voter, said the balance sheet reduction process should be on "autopilot" and reaffirmed his view that another rate hike was needed this year. In the morning, San Francisco Fed President John Williams, a non-voter, said the long-term growth picture is likely to be shrouded unless governments do more to prop up the economy.

Also read: Don't expect Janet Yellen to signal retreat in London on Fed's interest rate strategy (http://www.marketwatch.com/story/dont-expect-janet-yellen-to-signal-retreat-in-london-on-feds-interest-rate-strategy-2017-06-26)

Minneapolis Fed President Neel Kashkari, also a voter, will appear at a town hall discussion in Michigan at 5:30 p.m. Eastern.

The Conference Board's consumer confidence index rose to 118.9 (Draghi%e2%80%99s%20comments%20echoed%20those%20of%20Fed%20Chairwoman%20Janet%20Yellen%20after%20she%20attempted%20to%20downplay%20a%20recent%20raft%20of%20weaker-than-expected%20inflation%20numbers%20in%20the%20past%20few%20months%20to%20strengthen%20the%20case%20for%20continuing%20with%20its%20monetary%20tightening.%20But%20despite%20the%20economic%20recovery%20in%20the%20eurozone,%20he%20maintained%20the%20need%20for%20the%20ECB%20to%20stay%20accommodative.) in June from 117.6 in June, a sign that optimism among shoppers shows no signs of abating. The same report publishing the index showed that more Americans felt jobs were plentiful, indicating the labor market continues to improve. The unemployment rate now sits at 4.4%, a 16-year low (http://www.marketwatch.com/story/us-adds-138000-jobs-in-may-unemployment-drops-to-16-year-low-of-43-2017-06-02).

(END) Dow Jones Newswires

June 27, 2017 14:41 ET (18:41 GMT)