May 16, 2018 / 9:04 PM / 2 months ago

TREASURIES-U.S. 10-year yield rises to 7-year high, tests chart support

    * U.S. yields turn higher in late trading as early buying
fizzles
    * U.S. 10-year yield tests 3.10 pct, 3.21-3.23 pct seen next
    * Domestic factory output rises in April, housing starts
fall

 (Recasts lead, updates late market action)
    By Richard Leong
    NEW YORK, May 16 (Reuters) - U.S. Treasury yields rose on
Wednesday as the 10-year yield reached seven-year highs and
tested key technical support at 3.10 percent, which may touch
off another wave of bond sales if it rises much further above
that level.  
    Wednesday's yield increase followed Tuesday's bond market
selloff spurred by signs the U.S. economy is on a stronger
footing in the second quarter.
    "It's pure bearish momentum until it exhausts itself," said
Karl Haeling, vice president at Landesbank Baden-Wurttemberg in
New York. "Buyers don't want to come in until there is a better
sign of stability."
    Disappointing economic growth data in Japan as well as
concerns about the financial demands of a potential Italian
coalition government from its neighbors caused a drop in German
bond yields earlier Wednesday, briefly stemming another jump in
U.S. yields. 
    The 10-year yield's sharp rise on Tuesday to above 3.05
percent, which was seen as a key technical support level,
unnerved Wall Street as traders considered whether U.S. bonds
were gaining appeal as an alternative to riskier stocks.
    The higher U.S. yields, however, failed to sustain buying
interest in bonds amid lingering concerns about another surge in
Treasury debt supply and tensions between the United States and
its trading partners, analysts said.
    Data on Wednesday supported traders' view that the U.S.
economy is expanding but far from firing on all cylinders. They
did not change the notion that the Federal Reserve would stay on
its gradual interest rate hike path.
    U.S. industrial output grew 0.7 percent in April, while home
construction declined 3.7 percent last month, government data
showed.
    The 10-year Treasury yield was up 1.5 basis
points at 3.096 percent after touching 3.104 percent, which was
the highest level since July 2011, in late Wednesday trading,
Reuters data showed.
    The 10-year yield, if it climbs meaningfully above 3.100
percent, will easily march towards 3.21-3.23 percent, with 3.50
percent as the next major chart support, according to analysts. 
    The two-year yield, which is sensitive to
traders' views on Fed monetary policy, was marginally higher at
2.589 percent, which was the highest level since August 2008.
    The modest yield rise on Wednesday did not shake the view of
some investors that the bond market selloff is nearly done.
    "Until that is a follow-through on wage growth, these yield
levels are going to hold," said James Camp, managing director of
fixed income at Eagle Asset Management in St. Petersburg,
Florida.
    The 10-year yield reversed an initial decline as Wall Street
stock prices recovered some of Tuesday's losses. It also fell
earlier in step with a fall in German Bund yields.

    Italy's 10-year bond yield jumped nearly 19 basis points to
2.13 percent, its highest level since early March.
Italian yields jumped in the wake of a draft program for a
potential coalition government that revealed plans to demand 250
billion euros of debt forgiveness and create procedures to allow
countries to exit the euro. 
May 16 Wednesday 4:36PM EDT/ 2036 GMT
                               Price                   
 US T BONDS JUN8               140-27/32    -0-7/32    
 10YR TNotes JUN8              118-120/256  -0-36/256  
                               Price        Current    Net
                                            Yield %    Change
                                                       (bps)
 Three-month bills             1.8725       1.9075     -0.007
 Six-month bills               2.035        2.0847     0.000
 Two-year note                 99-150/256   2.5934     0.008
 Three-year note               99-152/256   2.7672     0.011
 Five-year note                99-28/256    2.9443     0.019
 Seven-year note               98-204/256   3.0683     0.021
 10-year note                  98-16/256    3.1019     0.022
 30-year bond                  98-40/256    3.2213     0.012
                                                       
   DOLLAR SWAP SPREADS                                 
                               Last (bps)   Net        
                                            Change     
                                            (bps)      
 U.S. 2-year dollar swap        22.75         1.25     
 spread                                                
 U.S. 3-year dollar swap        17.25         1.50     
 spread                                                
 U.S. 5-year dollar swap         9.25         1.25     
 spread                                                
 U.S. 10-year dollar swap        3.25         0.50     
 spread                                                
 U.S. 30-year dollar swap       -7.50         0.50     
 spread                                                
 


    
 (Reporting by Richard Leong
Editing by Paul Simao and Diane Craft)
  
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