By Sunny Oh

Treasury yields pared their rise on Thursday as investors grappled with a selloff in Italian debt that could be drawing investors into the perceived safety of U.S. government paper.

The 2-year Treasury note yield, sensitive to shifting expectations for U.S. monetary policy, was up by 0.5 basis point to 2.887%, after briefly pushing above 2.90% to hit a decadelong high. The 10-year note yield was up 0.3 basis point to 3.182%, down from its intraday high of 3.216%, while the 30-year bond yield rose 0.9 basis point to 3.355%, according to Tradeweb data.

Treasurys rebounded as risk assets, including stocks and Italian government debt, came under pressure, driving investors into haven assets. The Dow , S&P 500 and Nasdaq were all down by more than 1%.

European Central Bank President Mario Draghi said countries questioning the European Union's budget rules could damage growth and financial conditions in a summit on eurozone integration, according to Reuters News (https://twitter.com/LiveSquawk/status/1052946821071425537). The ECB President, however, did not name Italy directly in his remarks.

Earlier this week, Draghi had told the Italian government to tone down their rhetoric on the budget debate, amid concerns Italian politicians will push forward with a fiscal stimulus that would put Rome in conflict with Brussels.

The accelerating panic in the Italian bond market helped to widen yield spreads. The 10-year Italian bond yield rose 13 basis points to 3.674%, widening the spread between it and the German 10-year bond yield to 325 basis points, or 3.25 percentage points, its widest levels in five years. An expanding yield spread can show investors demanding further compensation for holding Italian debt as their perceived risks increase.

Investors also keyed into the minutes from the Federal Open Market Committee's September meeting. Treasurys initially sold off after the minutes showed Fed officials were mostly in favor of raising rates into restrictive territory, that is, until economic growth began to slow. Before the minutes, several Fed presidents had alluded to the growing consensus among the committee for rates to push higher above neutral, the theoretical level of monetary policy that neither slows or accelerates growth.

Despite concerns of a trade war and softer global expansion, central bankers appeared confident that growth and inflation would remain robust enough to allow the central bank to hike rates in a steady fashion.

"With inflation on track to reach the 2% target "on a sustained basis," there is a growing hawkishness within the FOMC in favor of "a modestly restrictive" monetary policy stance, underscoring our call for three rate hikes in 2019," said Kathy Bostjancic, an economist at Oxford Economics.

In Brexit negotiations between the European Union and the U.K., British Prime Minister Theresa May appeared willing to consider extending the 21-month transition period (http://www.marketwatch.com/story/pound-holds-steady-as-may-seen-weighing-extending-brexit-transition-2018-10-18) following the U.K.'s exit from the EU at the end of March, a move that would give the two sides more time to iron out an agreement on trade and other issues.

Upcoming economic data emphasized the tightness of the labor market. Jobless claims for the week ending in Oct. 13 fell 5,000 to 210,000 (http://www.marketwatch.com/story/jobless-claims-drop-5000-to-210000-in-mid-october-2018-10-18). New applications for unemployment benefits have continued to plumb multidecade lows.

(END) Dow Jones Newswires

October 18, 2018 12:41 ET (16:41 GMT)