* China disputes bond holding report
* ECB indicates may change policy message
* Benchmark yields hover near 10-month highs
NEW YORK, Jan 11 - Treasury yields fell early Thursday morning after China disputed a report that its government officials had recommended the country slow or halt its purchases of the U.S. bonds. China is diversifying its foreign exchange reserves in order to safeguard their value, the country's currency regulator said on Thursday, while dismissing a media report about its purchases of U.S. debt. The Bloomberg News story published Wednesday lifted yields on the 10-year government bond to a 10-month high as traders sold off their holdings. Despite the selloff, some analysts had their doubts about the story, citing China's ability to extricate itself from the market and the dearth of good investments in the global low-rate environment. "It didn't seem to make a whole lot of intuitive sense to us that the biggest holder of Treasuries, excluding the Fed, would say that theyre not buying," said Gennadiy Goldberg, interest rates strategist at TD Securities in New York. He continued, "To some extent it does suggest that the market is very jittery about potential sources of demand." Though yields were lower on Thursday morning, they did not reverse all of the gains made Wednesday, remaining near their highest level since March 2017. Hawkish European Central Bank (ECB) minutes helped bring yields off their lows. The ECB said it should revisit its policy message in early 2018 and gradually adjust its language to reflect improved growth prospects, the minutes showed.
Nervousness about reduced central bank accommodation put pressure on bonds this week, after the Bank of Japan said on Tuesday it will trim its purchases of Japanese government bonds.
Investors are next focused on Friday's Consumer Price Index. "Inflation is the lynchpin for the global outlook this year," said Goldberg. With inflation still well below the Federal Reserve's 2-percent target, investors are watching for any sign of a pick up. Bond yields fell slightly on Thursday after data showed U.S. producer prices fell for the first time in nearly 1-1/2 years in December amid declining costs for services. The market will also be watching for remarks about inflation in a speech by William Dudley, president of the New York Fed, at 3:30 p.m. ET (2030 GMT). At 9:30 a.m. ET (1330 GMT), 10-year yields were 2.559 percent, down from the high of 2.597 percent hit Wednesday, the highest level since March 15.
January 11 Thursday 9:34AM New York / 1434 GMT Price
US T BONDS MAR8 149-27/32 -0-7/32 10YR TNotes MAR8 122-244/256 -0-12/25
Price Current Net Yield % Change
Three-month bills 1.4025 1.427 0.003 Six-month bills 1.55 1.5839 0.000 Two-year note 99-206/256 1.9766 0.005 Three-year note 99-190/256 2.0892 0.000 Five-year note 99-12/256 2.3292 0.002 Seven-year note 98-144/256 2.4758 0.006 10-year note 97-84/256 2.5587 0.010 30-year bond 96-248/256 2.9024 0.011
DOLLAR SWAP SPREADS
Last (bps) Net
U.S. 2-year dollar swap 19.50 0.25
U.S. 3-year dollar swap 18.00 0.25
U.S. 5-year dollar swap 4.00 0.25
U.S. 10-year dollar swap -2.00 0.00
U.S. 30-year dollar swap -22.00 -0.50
(Reporting by Kate Duguid; Editing by Nick Zieminski)