December 8, 2016 / 8:25 PM / 9 months ago

TREASURIES-U.S. bond yields climb on ECB's plan to cut bond purchases

* ECB extends bond program, reduces monthly purchase amount
    * Futures imply traders nearly certain on U.S. rate increase
    * U.S. to sell $56 bln in 3-year, 10-year, 30-year debt

 (Updates market action, adds quote)
    By Richard Leong
    NEW YORK, Dec 8 (Reuters) - U.S. Treasury yields rose on
Thursday in line with their European counterparts after the
European Central Bank prolonged its bond purchase program, as
expected, but stunned traders by scaling back on how much bonds
it will buy each month.
    The ECB said it would trim its monthly pace of bond
purchases to 60 billion euros from 80 billion euros, starting
next April. The reduced pace of purchases will last into
December 2017, three months longer than what some analysts had
forecast.
    ECB President Mario Draghi, however, said the unexpected
move was not an outright winding-down of the central bank's
quantitative easing (QE) program, as policymakers would like to
see evidence of a sustained pickup in inflation in Europe.
    "It's not what the market had expected and hoped for, but he
left the door open," said Kevin Giddis, head of fixed income
capital markets with Raymond James.
    Draghi hinted the ECB could further extend bond purchases
and/or increase its monthly purchase pace in the event the euro
zone economy faltered. 
    Traders had worried the central bank would signal a clear
path to wrap up its asset purchase program, propelling bond
yields in Europe and the rest of the world higher.
    "This isn't going to last forever, but they are saying we
are going to keep doing this until inflation comes back," Larry
Milstein, head of U.S. government and agency trading at R.W.
Pressprich & Co. in New York, said, referring to the ECB's QE
plans.
    The benchmark 10-year Treasury note's yield was
up over 4 basis points at 2.393 percent, retreating from a
session high of 2.427 percent. 
    The 10-year yield held below the 2.492 percent level reached
on Dec. 1, which was its highest since July 2015, according to
Reuters data. 
    The German 10-year Bund yield was up 3 basis
points at 0.379 percent. 
    ECB's bond purchase changes came less than a week before the
Federal Reserve's policy meeting next Tuesday and Wednesday.
    Interest rates futures  implied traders saw a
98 percent chance the U.S. central bank would raise interest
rates by a quarter point next week and roughly a 50 percent
chance it would raise rates by at least another quarter point by
June 2017, CME Group's FedWatch program showed. 
    Prior to the Fed's rate decision, the Treasury Department
will sell $24 billion of three-year notes and $20 billion in
10-year notes next Monday and $12 billion of 30-year bonds next
Tuesday.  
 
  December 8 Thursday 3:08PM New York / 2008 GMT
                               Price                  
 US T BONDS MAR7               149-24/32    -1-14/32  
 10YR TNotes MAR7              124-120/256  -0-88/25  
                                            6         
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             0.5025       0.5101    0.005
 Six-month bills               0.6175       0.628     0.000
 Two-year note                 99-202/256   1.1082    0.004
 Three-year note               98-234/256   1.3789    0.009
 Five-year note                99-162/256   1.8275    0.030
 Seven-year note               99-152/256   2.1881    0.042
 10-year note                  96-128/256   2.398     0.051
 30-year bond                  95-184/256   3.0953    0.066
                                                      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap        23.00         0.75    
 spread                                               
 U.S. 3-year dollar swap        15.50         1.00    
 spread                                               
 U.S. 5-year dollar swap         0.75         0.50    
 spread                                               
 U.S. 10-year dollar swap      -14.25         1.25    
 spread                                               
 U.S. 30-year dollar swap      -53.25         1.00    
 spread                                               
 
    

    
 (Reporting by Richard Leong; Editing by Paul Simao and Nick
Zieminski)

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