By Sunny Oh and Rachel Koning Beals

U.K.'s 2-year gilt yield lies above Bank of England base rate, at highest since October

A global bond selloff continued on Thursday, driving some yields to their highest levels in more than a month, as investors digested messages from central banks this week on rolling back easy-money policies.

The U.S. followed the lead of rising yields elsewhere, although the moves for the Treasury market were lagging behind their international counterparts as traders see Europe's central banks potentially joining the Federal Reserve in tightening policy. With global markets so interconnected, higher yields outside of the U.S could prompt foreign buyers to rebalance their portfolios in favor of far-flung bond markets, if only to avoid overexposure to U.S. government paper.

The 10-year benchmark note's yield climbed 4.9 basis points to 2.277%, contributing to a 13 basis point weekly gain, the largest rise since Mar. 3. The yield for the two-year Treasury note rose 2 basis points to 1.381%, while the 30-bond yield added 3.9 basis points to 2.820%. Yields move inversely to prices; one basis point is one hundredth of a percentage point.

"The time is approaching when the [Federal Reserve] will no longer be the only major central bank in tightening mode," foreign-exchange strategists at BNP Paribas SA said in a note.

Read:The 'tightening slugfest' has started--and markets don't know what's about to hit 'em (http://www.marketwatch.com/story/the-tightening-slugfest-has-started-and-markets-dont-know-whats-about-to-hit-em-2017-06-29)

The yield on Germany's 10-year government bond rose as high as 0.44% on Thursday, its highest level in about a month, and considerably higher from where it started the week at around 0.25%, according to FactSet data. French 10-year government bonds followed closely, rising 7.8 basis points to 0.80%.

Part of the impetus for the move higher came from the European Commission's economic sentiment indicator hitting its highest levels since August 2007 (https://ec.europa.eu/info/business-economy-euro/indicators-statistics/economic-databases/business-and-consumer-surveys/latest-business-and-consumer-surveys_en), said Jody Lurie, director of fixed-income strategy at Janney Montgomery Scott. Stronger optimism from shoppers and businesses could mean May's weak inflation reading for the eurozone is only a blip and push the European Central Bank closer to tightening monetary policy.

Bonds were volatile midweek after a senior ECB official said market participants had misinterpreted ECB President Mario Draghi's comments on Tuesday as a prelude to a possible unwinding of the bank's EUR2.3 trillion ($2.6 trillion) bond-buying program. ECB officials maintained the bank's monetary policy outlook had not changed and that labor slack in the eurozone remained a concern, according to a report from Bloomberg News. (https://www.bloomberg.com/news/articles/2017-06-28/draghi-s-prudence-warning-confirmed-by-reaction-to-his-own-words)

See: What happened to Mario Draghi's silver tongue? (http://www.marketwatch.com/story/what-happened-to-mario-draghis-silver-tongue-2017-06-28)

Also, earlier this week, Bank of England Gov. Mark Carney said a broadening global economic recovery could make an interest-rate hike "necessary." (http://www.marketwatch.com/story/boe-chief-carney-hints-at-rate-rise-2017-06-28) That contrasted with comments a week ago when he argued further monetary tightening would be inappropriate amid concerns over how Brexit, the U.K.'s departure from the European Union, might slow growth.

The 10-year U.K. government bond, or gilts, climbed over 12 basis points to 1.214% Thursday.

The 2-year gilt yield touched 0.36% in the first hours of trading on Thursday--its highest level since October--leaving the policy-sensitive benchmark sitting above the current base rate of 0.25% set by the Bank of England for the first sustained period since Britain voted to leave the EU last June.

Back in the U.S., weekly jobless claims from the Labor Department rose 2,000 to 244,000 (http://www.marketwatch.com/story/jobless-claims-edge-up-by-2000-to-24400-2017-06-29)but the four-week jobless claims average fell 2,750 to 242,250, a sign that labor slack could be shrinking. First-quarter gross domestic product was revised higher to 1.4% (http://www.marketwatch.com/story/poor-start-to-2017-not-really-first-quarter-gdp-raised-again-to-14-2017-06-29).

Also on the docket, St. Louis Fed President James Bullard in London will discuss the U.S. economy and monetary policy at the Official Monetary and Financial Institutions Forum at 1 p.m. Eastern. But he is not a voting member of the Fed's rate-setting board in 2017.

 

(END) Dow Jones Newswires

June 29, 2017 11:26 ET (15:26 GMT)

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