Treasuries score largest selloff in three weeks

US Treasuries had their largest selloff in three weeks on Tuesday after minutes of the Federal Reserve's March policy meeting showed that policymakers appear less keen to launch a fresh round of monetary stimulus as the US economy improves. The Fed policymakers noted recent signs of slightly stronger growth but remained cautious about a broad pickup in US economic activity, focusing heavily on a still elevated jobless rate.
Treasuries had gained in price earlier on Tuesday on hopes that further debt purchases by the Fed would have a positive impact on Treasuries yields. "It seems the market is really disappointed," said Charles Comiskey, head of Treasuries trading at the Bank of Nova Scotia in New York. "I guess they were expecting more emphasis on the possibility of QE3 going forward."
Markets had taken fresh hope that a new round of easing was likely after Fed Chairman Ben Bernanke said last week the modest pace of US growth was unlikely to cut unemployment quickly, and that further stimulus would remain an option. Benchmark 10-year notes were last down 29/32 in price to yield 2.30 percent, up from around 2.18 percent before the minutes were released.
Thirty-year bonds fell 1-24/32 in price to yield 3.43 percent, up from 3.32 percent before the minutes. Bonds had their weakest day since March 14, when a brighter economic outlook by the Fed caused a dramatic jump in Treasuries yields. Benchmark 10-year notes yields soared over the course of that week and rose to a five-month high of 2.40 percent on March 20.
Investors will now be closely watching for any signs of further stimulus by the Fed's June meeting, when Operation Twist is scheduled to expire. Twist involves the Fed buying longer-term debt in a bid to reduce longer-term borrowing rates and selling short-term debt to fund the purchases.
The run-up to the US election may make it politically difficult to announce further easing after the June meeting, said Fidelio Tata, head of US interest rate strategy at Societe Generale in New York. "After June the window to act starts closing because of the elections and the Fed not wanting to interfere during the election process," he said.
Some analysts see unseasonably warm weather in the US this year as a wildcard for the Fed, which is increasingly focused on data for signs of whether further stimulus is needed.
This is because higher-than-normal temperatures may have distorted data to make it appear that the economy is stronger than it actually is. "The risk is big because the Fed has become very data-dependent," said Tata. "People fear that the distortion from the weather is so big that it may have sent a wrong signal earlier this year in terms of strong economic data, which will lead to a disappointment later on once they wash out of the data." Employment data for March is the next major economic release for markets.