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Yields drop as ECB stimulus hopes boosts demand

U.S. Markets Overview: Treasurys chart

U.S. Treasurys yields were little changed on Monday in light trading, as European bonds rallied on expectations the European Central Bank will use more stimulus to revive flagging growth in the region.

ECB President Mario Draghi said Friday the bank was prepared to respond with all available tools if euro zone inflation drops further. Investors took this to mean the ECB could start an asset purchase program or other stimulus measures, which would boost assets like stocks and bonds.

Draghi's comments caused yields on most euro zone government bonds to fall to record lows, with Treasurys also benefiting from the rally.

"Part of it is the rally in European rates. Generally markets are pricing for a higher chance of the ECB being more accommodative going forward," said Michael Chang, an interest rate strategist at Credit Suisse in New York.

Benchmark 10-year notes were up 9/32 in price to yield 2.39 percent. Trading was modest ahead of the U.S. Labor Day holiday on Sept. 1, with traders in Britain out for a bank holiday on Monday.

New supply is likely to be the major focus this week, with gross domestic product data on Thursday also anticipated. The Treasury will sell $93 billion in new coupon-bearing debt this week, including $29 billion in two-year notes on Tuesday, $35 billion in five-year notes on Wednesday and $29 billion in seven-year notes on Thursday. It will also sell $13 billion in two-year floating rate notes on Wednesday.

Europe and U.S. stock-market indexes were also boosted by comments from Federal Reserve Chair Janet Yellen and her European equivalent, Mario Draghi.

Speaking at the annual Jackson Hole symposium on Friday, Yellen reiterated that slack remained in the labor market, even as the American economy continues a five-year recovery. Draghi expressing confidence that stimulus already announced and a weaker euro would help the euro-zone economy. He added that the ECB remained ready to do more if needed.

—By Reuters with CNBC