US Treasuries prices fell on Friday and yields rose to their highest in over 22 months, marking a miserable week for the bond market as investors fled in the wake of a signal from the Federal Reserve that it might pare its bond purchases later this year.
The market selloff darkened the prospect for the $99 billion in coupon-bearing federal debt for sale next week following a poor $7 billion auction of 30-year Treasury Inflation-Protected Securities this week, even though some analysts said yields might be high enough to entice bargain-minded investors.
"The market is very reluctant to dip back into the water. Reduced participation is likely," Jennifer Vail, head of fixed income at US Bank's Wealth Management Group in Minneapolis, said about next week's Treasuries auction. In addition to Treasuries, investors further cut their holdings in corporate bonds, mortgage-backed securities and emerging market debt after Fed Chairman Ben Bernanke on Wednesday laid out the roadmap on how the US central bank might scale back its $85 billion monthly purchases of Treasuries and MBS, the pillar of its current quantitative easing program, which traders have dubbed QE3.
Investors pulled $508 million out of taxable US bond funds in the latest week, marking three consecutive weeks of outflows, according to Lipper, a unit of Thomson Reuters. On the open market, the benchmark 10-year Treasuries notes fell nearly 1 point in price for a yield of 2.533 percent, up 11.7 basis points from late on Thursday. The 10-year yield rose as high as 2.542 percent earlier, the highest intraday level since August 2011, according to Reuters data.
For the week, the 10-year yield was on track to rise 40 basis points for the biggest single-week jump since March 2003, according to Reuters data. In the mortgage-backed sector, where the Fed has been buying $40 billion a month, the yield premium on 30-year bonds that carry a 3.0-percent coupon and are backed by home loans guaranteed by Fannie Mae over five-year Treasuries grew to 2.20 percent, the highest since December 2011, according to Reuters data.
Trading volume was heavy for a third straight day. ICAP, the world's largest inter-dealer broker of government debt, said $492 billion of US Treasuries had traded as of 2 pm (1800 GMT) on Friday, 14 percent above the 20-day average of $433.941 billion at this time.
While longer-dated Treasuries have been the biggest losers during the dramatic spike in yields since April, five- and seven-year notes were the worst performers this week as these maturities, commonly referred to by traders as the "belly" of the US yield curve, have been targeted by the Fed's QE3 purchases. The Fed bought $1.46 billion in bonds due 2036 and 2043 on Friday as part of its ongoing purchase program. Five-year notes were last down 18/32 in price to yield 1.428 percent, and seven-year notes fell 25/32 in price to yield 1.971 percent, both the highest yields since August 2011.
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