By Sam Goldfarb and Daniel Kruger 

U.S. government bond prices fell again Tuesday, pushing the 10-year Treasury note's yield closer to a seven-year high amid gathering optimism about the global economy and expectations for tighter monetary policy from major central banks.

The yield on the benchmark 10-year U.S. Treasury note rose to 3.102% from 3.078% Monday, settling just below its May 17 close of 3.109% -- a high-water mark dating back to July 2011.

Yields, which rise when bond prices fall, have been climbing this month thanks in part to encouraging developments in emerging markets and Italy, which were at the center of investors' concerns just a month ago.

This week, investors have had further reason to sell bonds as European Central Bank President Mario Draghi delivered an upbeat assessment of the eurozone economy and confirmed a plan, announced in June, to end the ECB's EUR2.5 trillion ($2.95 trillion) bond-buying program in December.

Investors on Tuesday were also contending with another round of Treasury debt auctions and anticipating the conclusion of the Federal Reserve meeting on Wednesday, when policy makers are widely expected to raise interest rates for a third time this year against the backdrop of strong economic data.

"On the surface it looks like the U.S. is firing on all cylinders," said Jack McIntyre, who manages bond portfolios at Brandywine Global Investment Management. "You're not supposed to own bonds in that environment."

Rising Treasury yields serve as a reference rate for lending throughout the economy. Higher yields could curb access to credit for consumers and businesses and curtail growth, though evidence of that happening so far is limited.

In recent weeks, central bankers in Argentina and Turkey sought to tame rapid inflation and financial turmoil by substantially raising interest rates. There are have also been signs that Italy's new populist government -- which wants to slash taxes and raise social benefits -- can deliver its first budget without driving a rift with the European Union.

Reflecting optimism about Europe, the yield on Italy's 10-year government bonds fell 0.06 percentage points Tuesday to 2.885%, according to Tradeweb. That narrowed the closely-watched gap with Germany's 10-year yield, which extended recent gains by climbing 0.03 percentage points to 0.544%.

One factor that could limit the rise of Treasury yields is U.S. inflation data. While average hourly earnings rose 2.9% in August from the year before, there has been no big rise in overall inflation, which is a main threat to government bonds because it erodes the purchasing power of their fixed returns.

If higher wages can spur inflation, "then we will be talking about 10-year yields at 3.5% pretty soon," said Ray Remy, head of fixed-income trading in New York at Daiwa Capital Markets America Inc.

Write to Sam Goldfarb at sam.goldfarb@wsj.com and Daniel Kruger at Daniel.Kruger@wsj.com

(END) Dow Jones Newswires

September 25, 2018 16:07 ET (20:07 GMT)

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