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Yields rise as central bank hopes boost riskier assets

NEW YORK - US Treasuries yields rose on Wednesday as increasing hopes that central banks globally will act to stem slowing growth boosted demand for riskier assets, and reduced demand for safe-haven bonds.

Increased expectations that central banks will act has helped boost risk assets including stocks in the past two days, even as data globally points to a worsening economic slowdown.

In the US investors are watching for signs of further stimulus from the Federal Reserve, where officials have already started to think about new tools they can use beyond a possible third round of quantitative easing to try to renew growth.

“The market is caught between sinking global growth and increased probability of further central bank action,” said Guy Haselmann, head of US interest rate strategy at Bank of Nova Scotia in New York.

Demand for safe-haven bonds also ebbed on Wednesday after a European Central Bank policymaker said there were reasons to boost the firepower of the euro zone’s new bailout fund to tackle the region’s deepening debt crisis.

Governing Council member Ewald Nowotny said there were arguments for giving Europe’s permanent rescue fund a banking license, which would allow it to borrow unlimited ECB money, an idea that the central bank has rejected so far.

Treasuries also were hurt by weakness in German bunds, which have been worsening since Moody’s Investors Service on Monday changed its outlook for Germany, the Netherlands and Luxembourg to negative, from stable.

The rating action added to concerns that the countries will face higher costs from bailing out struggling countries in the euro zone.

US bonds typically fall in concert with German government debt, though in recent weeks Treasuries have benefited from an outflow from even the safest euro zone countries.

“US Treasuries are gaining from the fight out of some of the other safe havens,” said Haselmann.

The additional yield offered by 10-year Treasuries over 10-year German bunds has fallen to 12 basis points, from 30 basis points last Friday, before the Moody’s action.

Haselmann expects Treasuries yields should continue to fall relative to German debt and drop below German bond yields.

“Given the liquidity premium, I would think we should trade through bunds,” he said.

Meanwhile the Treasury is expected to see solid demand for a $35 billion sale of new 5-year notes, the second sale of $99 billion in supply this week.

US Treasuries hit new record low yields on Tuesday after the Treasury sold $35 billion in two-year notes at a record low yield of 0.22 percent. The debt sold bid/cover ratio of 4 times, the second highest demand on record.

The Treasury will sell an additional $29 billion in seven-year notes on Thursday.