Yields fall from four-year highs as stocks drop

By Karen Brettell

NEW YORK (Reuters) - U.S. Treasury yields fell from four-year highs on Monday after a rapid selloff in equity markets sparked demand for the low risk debt.

Bonds have been roiled in the past week on fears that the Federal Reserve will need to adopt a more aggressive rate hike policy as inflation data improves.

Data on Friday showed that the year-on-year increase in average hourly earnings rose to 2.9 percent, the largest rise since June 2009.

The rising debt yields initially were seen as weighing on stocks as investors worried that higher rates would slow down growth.

On Monday, the stock selloff accelerated, drawing investors back into lower risk bonds.

"The magnitude of the selloff versus how far it's come really didn’t raise any alarm bells in the stocks until the velocity picked up this afternoon," said Lou Brien, a market strategist at DRW Trading in Chicago.

The wage data and expectations of higher price pressures resulting from the recent tax overhaul and on expectations of infrastructure spending "all fed into inflation expectations, and it wasn’t that the Fed was going to raise rates too much, it was that they weren’t going to be quick enough," Brien said.

Benchmark 10-year note yields surged to 2.885 percent overnight, the highest since January 2014, before falling as low as 2.707 percent as stock selloff hastened.

They last traded at 2.766 percent.

Some investors had been reluctant to stand in the way of the selloff, which has sent 10-year yields up from a low of 2.654 percent last Monday, until they see signs of stabilization.

“Even if you think it’s gone too far, or even if you think we’ve sold off a little more than probably warranted at this point, you don’t really have those buyers that are willing to step in and stop it until we see some signs of slowing,” said Blake Gwinn, an interest rate strategist at NatWest Markets in Stamford, Connecticut.

Investors are also nervous about bond yields as the Treasury is due to significantly increase issuance this year to make up for declining Fed purchases.

The Treasury will sell $66 billion in notes and bonds this week, including $26 billion in three-year notes on Tuesday, $24 billion in 10-year notes on Wednesday and $16 billion in 30-year bonds on Thursday.

Data on Monday showed that U.S. services sector activity raced to a near 12-1/2-year high in January, buoyed by robust growth in new orders.

(Editing by Andrea RicciEditing by Chizu Nomiyama)

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