October 4, 2018 / 6:15 PM / 6 months ago

TREASURIES-Two-day bond selloff pushes U.S. benchmark yield to 7-year high

(Adds details on high-yield spread, PIMCO CIO’s comment; updates yields)

By Kate Duguid

NEW YORK, Oct 4 (Reuters) - A selloff in U.S. Treasury bonds that has sent yields to multi-year highs continued on Thursday, pushing the benchmark 10-year bond yield to its highest level since May 2011.

The yield on the benchmark 10-year note hit a high of 3.232 percent, marking its largest daily jump since the 2016 U.S. presidential election, on anticipation that monthly U.S. jobs data on Friday would be stronger than expected.

Treasury yields soared on Wednesday after data showed the U.S. service sector activity hit a 21-year high and the ADP private payrolls data for September was unexpectedly strong. An index compiled by Bank of America Merrill Lynch, which broadly measures Treasury market prices, posted its worst one-day price loss since March 2017.

The spread between that index and the comparable BAML high-yield index shrank to the narrowest since 2007 as a result, with analysts closely watching levels to see if they might signal a coming end to the credit cycle.

Pimco Group Chief Investment Officer Dan Ivascyn, who helps oversee more than $1.71 trillion, said on Thursday that U.S. Treasuries look more attractive because of higher yields but only in the short end of the curve.

“In the short-term, we expect more volatility in rates,” he said. “But we are probably closer to adding than selling.”

Of particular interest in Friday’s payrolls report will be average hourly earnings.

“That sense of the market’s rising discomfort about inflation risks leads me to expect the wage inflation reading within the U.S. nonfarm payrolls on Friday will be critical to the current sell-off,” wrote Brian Daingerfield, macro strategist at NatWest Markets.

Expectations for Friday’s data may have risen too far.

“It is possible we’ll see some retracement of the recent sell-off if the data disappoints or even if it doesn’t match the expectation for the potential for a very strong print, particularly in average hourly earnings,” said Jon Hill, U.S. rates strategist at BMO Capital Markets.

Trading in the global rates market was three times its normal volume in the Asian session, which boosted the 30-year Japanese government bond yield to its highest level since February 2016, according to research from BMO Capital Markets. The benchmark German government bond also rose to its highest since May 2018.

The U.S. data on Wednesday likely will keep the Federal Reserve on track to raise interest rates again in December and suggest the U.S. central bank’s tightening cycle is unlikely to end any time soon. The Fed increased rates last week for the third time this year.

Reporting by Kate Duguid Editing by Nick Zieminski and Paul Simao

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