TREASURIES-U.S. 10-year yields top 1.26% as reflation bets gather pace

(Updates prices, adds chart)

TOKYO/LONDON Feb 16 (Reuters) - U.S. 10-year Treasury yields raced above 1.26% on Tuesday for the first time since last March as expectations of extended fiscal and monetary stimulus alongside hopes of an economic upswing gave the reflation trade another leg higher.

Ten-year yields rose as high as 1.267%, up six basis points on the day, before easing by 1315 GMT to 1.245%

Treasuries were also playing catch up with a global bond selloff on Monday when U.S. markets were shut for the Presidents Day holiday. German 10-year yields rose on Monday to the highest in six months while Swiss 30-year yields climbed above 0% for the first time since last April.

Thirty-year U.S. yields rose too, touching a one-year high of 2.08% and are some 40 bps above where they closed 2020.

President Joe Biden has been drumming up support for a $1.9 trillion coronavirus relief package. Meanwhile optimism about vaccine rollouts has lifted stocks and commodity prices globally at the expense of safe-haven assets like Treasuries and German Bunds.

“The market has fully embraced the prospects of Biden’s $1.9 trillion stimulus, and the accelerated vaccine rollout is support of further bearish price action as well,” Westpac strategists told clients.

Bond yield curves -- considered a reliable barometer of growth expectations -- have steepened too, with the gap between two-year and 10-year U.S. notes now around 114 bps, the widest since April 2017.

But while long-dated yields have soared, two-year borrowing costs have barely budged since end-2020 given expectations the Federal Reserve will keep policy rates near zero for years to come.

Fed Chair Jerome Powell last week pledged “patiently accommodative monetary policy” to get the United States back to full employment. Investors will look to the Fed’s January meeting minutes on Wednesday for confirmation of that stance.

The view that the Fed may let the economy run hot has pushed 10-year inflation expectations near the highest since 2014 at 2.22% but “real” or inflation-adjusted yields remain deep in negative territory.

Demand for inflation-linked and long-dated debt will be tested this week when the Treasury Department sells $27 billion in 20-year bonds on Wednesday and $9 billion in 30-year Treasury Inflation-Protected Securities (TIPS) on Thursday.

“Policymakers may do little to stop inflation compensation from rising any time soon – if anything they might welcome it,” Oliver Jones, senior markets economist at Capital Economics, wrote in a note.

Additional reporting by Sujata Rao and Abhinav Ramnarayan in London; Editing by Chizu Nomiyama