Bonds

US Treasury yields rise after ECB moves to discuss ending stimulus

Key Points
  • ECB Chief Economist Peter Praet said the bank will discuss next week how to temper its €30 billion ($35 billion) monthly purchasing program.
  • The U.S. government says the trade deficit dropped 2.1 percent to $46.2 billion in April, its smallest level since September.
  • Trade continues to be a tense topic between the U.S. and its key partners, however. Canada, Mexico and the EU all announced retaliatory tariffs on the U.S. within the past week.

U.S. government debt yields rose Wednesday after the European Central Bank's chief economist said the bank is set to discuss the end of its massive bond-buying program.

ECB Chief Economist Peter Praet said the bank will discuss next week how to temper its €30 billion ($35 billion) monthly purchasing program originally introduced to help revive the euro zone's economy following the sovereign debt crisis.

"Signals showing the convergence of inflation towards our aim have been improving, and both the underlying strength in the euro area economy and the fact that such strength is increasingly affecting wage formation supports our confidence that inflation will reach a level of below, but close to, 2 percent over the medium term," Praet said Wednesday.

The threat of less accommodative monetary policy in Europe, in turn, helped spur a sell-off in American debt. The yield on the benchmark 10-year Treasury note was higher at around 2.97 percent at 11:39 a.m. ET, while the yield on the 30-year Treasury bond was also up at 3.125 percent. Bond yields move inversely to prices.

"This has been a long time coming, because most of the transparency from the ECB is a series of vague comments about the future of quantitative easing. Today they took a bolder step by saying that it was 'time to discuss' the stoppage of its bond‐buying program," wrote Kevin Giddis, head of fixed income capital markets at Raymond James.

Treasurys

"It begins with the message disclosure, then eventually it makes its way to reducing, then eliminating its purchases altogether," he added. "They (the ECB) still have an inflation (lack of) problem, so this may take a while to unwind, much like the Federal Open Markets Committee has done in this country."

Investors have been cautious on Treasurys as of late amid expectations of rising inflation, which may encourage the U.S. central bank to tighten monetary policy more quickly.

With the U.S. economy continuing to add jobs at a solid clip — including the recent May print — investors are scrutinizing wage data, which could precede a broader increase in prices throughout the economy.

The U.S. government said the trade deficit dropped 2.1 percent to $46.2 billion in April, its smallest level since September. The Commerce Department also revised its March figures, saying the deficit fell to $47.2 billion instead of the previously reported $49 billion.

The trade trend, if persistent, could wind up contributing to economic growth for the current quarter after a lackluster impact earlier this year.

However, trade continues to be a tense topic between the U.S. and its key partners. Canada, Mexico and the EU all announced retaliatory tariffs on the U.S. within the past week in response to the Trump administration's decision not to exempt those economies from global steel and aluminum levies.

The latest developments follow threats between China and the U.S. over Beijing's "unfair" trading practices and massive trade surplus. Representatives for both nations are engaged in negotiations in an attempt to avoid the taxes.

The White House remained upbeat, however, stating that it continues to seek strong ties with the nations involved.

Now a summit between leading political figures is due to take place in Quebec, Canada, this week, with the topic of trade expected to be of key importance.

Investors will also be keeping an eye out for any new surrounding the relationship between the U.S. and North Korea, as a summit between Trump and Kim Jong Un draws closer.