By Sunny Oh

10-year yields continue to stay below 2.30%

Treasury yields rose Thursday after strong economic data offset haven-driven buying tied to political uncertainty in the White House.

The Treasury yield for the 10-year note gained 1.7 basis point to 2.233%, paring back from Wednesday's steep decline of 11.4 basis points, the largest tumble in 11 months. Yields move inversely to bond prices; one basis points is equal to one hundredth of a percentage point.

The Treasury yield for the 2-year note added 2.0 basis points to 1.266, while the 30-year bond rose 0.9 basis point to 2.906%. (http://www.marketwatch.com/story/bond-analysts-ignore-trump-controversy-to-keep-outlook-for-treasurys-unchanged-2017-05-17)

Bond yields and stocks staged a modest rebound after a pair of upbeat economic data helped to provide Wall Street some assurances that the economy remains on a relatively stable footing. That, in turn, may support the Federal Reserve's plan to raise interest rates at least two more times in 2017, and as soon as June. Anticipation of higher rates can deflate existing bond prices and push yields higher.

In a speech to members of the Economic Club of Minnesota on Thursday, Loretta Mester said the Fed needs to keep raising interest rates this year if economic conditions continue on their current pace. Mester doesn't hold a vote on monetary policy in 2017 as part of the Fed's rotational panel.

On Thursday, economic reports offered an optimistic bent.

New applications for unemployment benefits fell 4,000 to 232,000 for the period ended May 13th, while continuing jobless claims declined 22,000 to 1.9 million in April, the lowest since November 1988 (http://www.marketwatch.com/story/americans-on-unemployment-rolls-lowest-since-1988-2017-05-18), the Labor Department said on Thursday. A tightening labor market could stoke inflation and have a corrosive effect on bond's fixed payments.

Also, the Philadelphia Fed reported its manufacturing index, which measures business sentiment for the state, had jumped to 38.8 in May (http://www.marketwatch.com/story/philly-fed-index-soars-to-388-in-may-2017-05-18) from 22.0 in April. The Conference Board's Leading Economic Index, which forecasts the direction of the U.S. economy, rose 0.3% in April (http://www.marketwatch.com/story/us-leading-indicators-point-to-faster-economic-growth-2017-05-18).

(http://www.marketwatch.com/story/us-leading-indicators-point-to-faster-economic-growth-2017-05-18) (http://www.marketwatch.com/story/us-leading-indicators-point-to-faster-economic-growth-2017-05-18)The Chicago Mercantile Exchange's data showed the probability of a June rate hike up to 73.8% from 64.6% yesterday.

The pickup in bond yields follows a parade of news reports centered on President Donald Trump's administration's ties to Russia and allegations that the president attempted to interfere with a federal probe, before firing James Comey, the director of the Federal Bureau of Investigation, last week. Additional reports on Thursday allege that Trump officials had contact with Russian officials (http://www.reuters.com/article/us-usa-trump-russia-contacts-idUSKCN18E106) several time.

Bond investors have been rattled by the political drama because it casts doubt on the president's ability to implement economic-stimulus measures, including infrastructure spending, that could lift inflation and push yields higher.

"There's going to be a hesitancy to price in the fiscal agenda again," said Lisa Hornby, a portfolio manager at Schroders Investment Management. "The market's going to be more reticent to trade off headlines that the administration wants to get something done."

However, risk appetite appeared to return on Thursday, with the Dow Jones Industrial Average and the S&P 500 indexrebounding (http://www.marketwatch.com/story/fragile-start-ahead-for-us-stocks-as-political-concerns-weigh-heavy-2017-05-18) from their worst daily decline since September in the previous session.

(http://www.marketwatch.com/story/us-leading-indicators-point-to-faster-economic-growth-2017-05-18) (http://www.marketwatch.com/story/us-leading-indicators-point-to-faster-economic-growth-2017-05-18)In other fixed-income action, an $11 billion sale of 10-year Treasury inflation-protected securities received healthy bids, suggesting that investors are expecting measures of inflation to pick up. So-called TIPs are used by investors to help protect investors against the erosion of a bond's value due to rising future prices.

"Bottom line, whatever you think about current inflation trends, the demand for inflation protection over the next 10 years in this auction was almost off the charts " said Peter Boockvar, chief market analyst at The Lindsey Group in a research note. A healthy level of inflation tends to be viewed as a sign of a good economy.

See: Bond analysts ignore Trump controversy to keep outlook for Treasurys unchanged (http://www.marketwatch.com/story/bond-analysts-ignore-trump-controversy-to-keep-outlook-for-treasurys-unchanged-2017-05-17).

(END) Dow Jones Newswires

May 18, 2017 17:38 ET (21:38 GMT)

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