U.S. yields at 10-month high on China report; S&P 500 snaps rally

By Caroline Valetkevitch

NEW YORK (Reuters) - U.S. Treasury yields hit 10-month peaks as investors worried that China would slow U.S. government bond purchases, but they retraced to end nearly unchanged on Wednesday, and the S&P 500 stock index snapped its six-day rally.

The Bloomberg News report that China, the world's biggest holder of U.S. Treasuries, could slow or stop buying the government bonds also pushed the U.S. dollar to a more than six-week low against the Japanese yen.

The dollar rose against its Canadian counterpart and Mexico's peso after a Reuters report said Canada increasingly believes that U.S. President Donald Trump will soon announce his intention to withdraw from the North American Free Trade Agreement treaty.

The NAFTA news alongside the report on China weighed on U.S. stocks, which have had a strong run so far in the new year. The Nasdaq also broke a six-day string of gains.

"The Chinese are applying pressure to the Treasury market just as the (Federal Reserve) is about to step away from being the buyer of last resort," said Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York.

Benchmark 10-year note yields were last down to 2.558 percent, after peaking at 2.597 percent, the highest since March 15.

The yield curve between two-year notes and 10-year notes was last flatter at 58.6 basis points, after steepening to 62.4 basis points earlier Wednesday.

Earlier, Germany's 10-year bond yield hit its highest since the October European Central Bank meeting when policymakers first announced the extension of its bond-buying scheme.

A combination of factors has pushed global bond yields higher in recent weeks, with global growth and higher oil prices leading investors to speculate that the world's major central banks might withdraw from their stimulus programme sooner rather than later.

On Wall Street, the Dow Jones Industrial Average fell 16.67 points, or 0.07 percent, to 25,369.13, the S&P 500 lost 3.06 points, or 0.11 percent, to 2,748.23 and the Nasdaq Composite dropped 10.01 points, or 0.14 percent, to 7,153.57.

"The market has started on a very strong note this year. Right or wrong, you're hearing an overwhelming bullishness from strategists suggesting that the market momentum move should continue as the year progresses, so you have a lot of money flowing into the market," said David Katz, chief investment officer at Matrix Asset Advisors in New York.

"Today's move was negative. It's the first time basically in a year where people have any concerns about bonds possibly competing with stocks, so that's where you had the early selloff," he said, but the recovery from early lows points to the positive sentiment.

The pan-European FTSEurofirst 300 index lost 0.32 percent and MSCI's gauge of stocks across the globe shed 0.05 percent.

In the foreign exchange market, the dollar touched 111.29 yen, its weakest since late November, but was last flat.

The dollar index fell 0.18 percent.

Crude oil prices settled near three-year highs after U.S. government data showed a drop in crude inventories and production, even as fuel inventories rose.

U.S. crude futures settled at $63.57 a barrel, up 61 cents, or 1 percent, their highest settlement since December 2014. Brent crude futures settled at $69.20, up 38 cents. The session high for the global benchmark was $69.37, which was the highest since May 2015.

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(Additional reporting by Saqib Iqbal Ahmed and Karen Brettell in New York; Editing by Nick Zieminski and James Dalgleish)