US Treasury prices sag

US government debt prices sank on Wednesday as higher oil prices fanned inflation fears and stronger-than-expected data on durable goods eased recession worries, curbing the appetite for bonds. The yield on two-year Treasury notes broke above 2.60 percent to its highest level since early January after poor reception to the Treasury's $30 billion auction of new two-year notes.
"The durable goods data got it (the sell-off) started. You have oil back up again. The two-year note auction didn't go well," said Andrew Harding, director of taxable fixed-income at Allegiant Asset Management in Cleveland.
Within the Commerce Department's durable goods report, non-defence capital orders excluding aircraft, which is seen as a key gauge of business investment, rose by 4.2 percent, marking the biggest increase since December. Analysts said that while the US economy is clearly struggling, the stronger-than-expected durable goods orders was evidence that the country may not be stuck in a recession.
The better-than-expected economic news also supported the view that the Federal Reserve will hold interest rates steady in the foreseeable future and may raise rates later this year.
Fed officials in recent days have stepped up their rhetoric on inflation amid surging energy and food prices. On Wednesday, Minneapolis President Gary Stern said overall inflation growth is clearly too rapid for comfort due to food and energy costs. US oil futures rose $2 on Wednesday to $131 a barrel after hitting a record $135.09 last week. Inflation concerns, along with other bond-negative factors, pushed Treasury prices sharply lower.
Benchmark 10-year Treasury notes were down 27/32 at 98-24/32. The yield, which move inversely with its price, was 4.03 percent, its highest since January 2, from 3.92 percent late on Tuesday. Five-year notes were 19/32 lower in price to yield 3.36 percent, down 13 basis points on the day, while 30-year bonds were down 1-3/32 for a 4.71 percent yield, down 7 basis points from late Tuesday.
Looking ahead, the Treasury market is vulnerable to further downward pressure on Thursday from the same factors - less gloomy data, higher oil prices and more debt supply, analysts said.
The government is slated to release its weekly readings on jobless claims and revised figures on first-quarter gross domestic product. A larger-than-expected upward adjustment on first-quarter growth would reduce recession fears and curtail demand for Treasuries, analysts said.
Economists polled by Reuters forecast that first-quarter GDP will likely be revised to 0.9 percent from the initial reading of 0.6 percent growth. The Treasury Department is scheduled to auction $19 billion in five-year debt after Wednesday's record monthly offering of two-year notes.