Bond yields rise on doubts ahead of ECB meeting

US 10-YR
US 30-YR

U.S. Treasurys yields rose on Tuesday after traders took profits on uncertainty ahead of a highly anticipated European Central Bank meeting this week.

Traders reevaluated expectations that the ECB might embark on new quantitative easing to ward off deflation at Thursday's meeting. Doubts as to the ECB's plans drove German government bond and Treasuries yields higher.

"It could be those expectations were getting a little bit lofty," said Stanley Sun, interest rate strategist at Nomura Securities International in New York, citing the expectations for more ECB stimulus. "I wouldn't be surprised if we get more volatility heading into Thursday."

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German Bund yields plunged to record lows last week, pulling Treasurys yields lower with them, following comments from ECB President Mario Draghi at a central bank symposium in Jackson Hole, Wyoming hinting at the potential for more stimulus.

The uncertainty led traders to take some profits on Treasurys. U.S. yields remained high following strong data on U.S. manufacturing and construction spending.

Financial data firm Markit said its final U.S. Manufacturing Purchasing Managers Index rose to 57.9 in August from 55.8 in July, marking its highest level since April 2010. The Institute for Supply Management said its index of national factory activity rose to 59.0, marking its highest level since March 2011.

U.S. construction spending rose 1.8 percent in July, according to the Commerce Department. That topped expectations for a 1.0 percent increase, according to a Reuters poll.

"Any positive news on the economy tends to be a foregone conclusion," Sharon Stark, chief fixed income strategist at D.A. Davidson in St. Petersburg, Florida, said of the small impact of the data on Treasuries yields. "The market is really focused on the ECB."

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U.S 10-year Treasury notes were last down 17/32 in price to yield 2.41 percent, up from a yield of 2.35 percent late Friday. Thirty-year Treasury bonds were last down 1-13/32 in price to yield 3.15 percent, up from 3.09 percent late on Friday.

In addition to the ECB meeting, traders are looking ahead to Friday's U.S. employment data, which could affect views on when the Federal Reserve will hike interest rates. That led traders to take some profits from last week's higher prices and drop in Treasuries yields.

The Fed "might tweak their wording to prepare the market for an eventual rate hike" if the jobs number comes in better than expected, said Nomura's Sun. U.S. employers are expected to have added 225,000 jobs in August, according to a Reuters poll.

—By Reuters