(Adds BOE, quotes, auction results; updates prices)
* Bonds weaken as BOE's Carney warns of rate hike
* Yield curve steepens from flattest since 2007
* Treasury sells $28 bln seven-year notes
By Karen Brettell
NEW YORK, June 28 Long-dated U.S. Treasury
prices weakened on Wednesday as central banks in Europe were
deemed to strike a more hawkish tone, even after reports that
markets had misinterpreted comments by European Central Bank
President Mario Draghi on Tuesday.
Bonds weakened and the euro gained after Draghi indicated
the ECB might tweak its stimulus so that it does not become more
accommodative as the economy recovers.
Reports on Wednesday said, however, that Draghi intended to
signal tolerance for a period of weaker inflation, not an
imminent policy tightening, according to sources familiar with
“The big trigger of action this morning has been the walk
back of Draghi’s more hawkish comments yesterday,” said Guy Le
Bas, chief fixed income strategist at Janney Montgomery Scott
LLC in Philadelphia.
Bonds pared price losses after the ECB reports, before
weakening again after Bank of England Governor Mark Carney said
that a rise in British interest rates is likely to be needed as
the economy comes closer to running at full capacity.
“They are talking about tightening sooner or later so that
definitely got the market’s attention,” said Dan Mulholland,
head of Treasuries trading at Credit Agricole in New York.
Benchmark 10-year notes fell 7/32 in price to
yield 2.22 percent, up from 2.20 percent late on Tuesday. The
yields rose as high as 2.256 before the ECB reports.
Bond yields rose even as markets approached month-end
rebalancing, which typically increases demand for Treasuries.
“The index extension is kind of small so I think that’s one
reason why the market hasn’t been trading as well as it normally
might do in the week of a month-end,” said Mulholland.
The yield curve between five-year notes and 30-year bonds
steepened to 95.8 basis points after falling to
91.9 basis points overnight, the lowest since late 2007.
The yield curve has flattened in the past month as Federal
Reserve officials indicated that further monetary policy
tightening was likely even as inflation falls below targets.
The Treasury Department on Wednesday sold $28 billion in
seven-year notes to moderate demand, in the final sale in $88
billion of new coupon-bearing supply this week.
The notes sold at a high yield of 2.056 percent, just above
where the debt had traded before the auction.