US Treasury prices fell sharply on Friday as a report showing surprising manufacturing strength brought forward market expectations for an eventual interest rate increase from the Federal Reserve.
Two-year yields recorded their biggest daily jump in 10 weeks while benchmark 10-year yields hit a one-month high after the Institute for Supply Management's factory index climbed to 66.2 in December from November's already lofty 62.8.
Not only did the results far surpass Wall Street forecasts for a pullback to 61.0, but the various components were also solid enough to suggest continuous growth ahead.
The new orders index in particular jumped to its highest level since 1950.
ISM's employment index rose further to 55.5 from 51.0 offering hope for lasting improvement in the languishing labour market.
That could see some analysts revise higher their forecasts for the December payrolls report due next week.
All this suggested official interest rates might rise earlier than the market had expected, which sent bond prices reeling.
"It's strong, strong and strong. There are no weak spots," said Ram Bhagavatula, chief economist at Royal Bank of Scotland Financial Markets.
"The bond market is still focused heavily on the Fed commitment. The Fed is increasingly telling us that it's the performance of the economy rather than a point in time that dictates policy change. And the performance of the economy is here," he added.
The central bank has a chance to update its view this weekend with Fed Chairman Alan Greenspan talking on: "Risk and Uncertainty in Monetary Policy".
Speaking on Sunday are Fed governor Ben Bernanke and Vice Chairman Roger Ferguson, giving the market plenty to react to when it reopens on Monday.
The market was off its lows by the end of the session but the benchmark 10-year Treasury note remained 31/32 lower in price, leaving its yield at 4.38 percent from 4.25 percent on Wednesday. A couple of weeks ago it had been trading down at 4.10 percent.
Two-year notes lost 7/32, shoving the yield up to 1.95 percent from 1.84 percent before the New Year holiday.
Five-year notes lost 19/32, yielding 3.35 percent from 3.22 percent. The 30-year bond shed 1-17/32, pushing its yield up to 5.17 percent from 5.07 percent.
Treasuries had been lower ahead of the figures as the market took back some safe-haven premium, amid relief that the holiday passed with no major attacks beyond another deadly blast in Baghdad.
Equities also started the new year in fine form, apparently on hopes for a continued pick-up in the global economy. This attracted money away from bonds.
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