US Treasury debt prices retreated on Thursday as investors cashed in safe-haven government debt to join a two-day stock rally. After a sell-off provoked by stronger-than-expected increase in wholesale and consumer prices in May, bonds slipped again on Thursday, hurt by several reports that reflected continued growth in the US economy.
A robust stock market rally, following a four-week decline, also helped keep bonds mired in the minus column. In late trade, two-year notes were down 2/32 for a yield of 5.15 percent, a five-year high and up 17 basis points since Monday. Benchmark 10-year notes were off 7/32, yielding 5.10 percent, up from 5.07 percent.
"The bond market story is all about the recovery in the stock market," said Chris Rupkey, senior financial economist at Bank of Tokyo/Mitsubishi UFJ. "Today's over-the-top gain for equities will boost emerging market stock markets overnight, so bond traders do not want to be long going into tomorrow."
Stocks extended Wednesday's late rally, with the Dow Jones industrial average advancing 1.8 percent to end above 11,000 and the Nasdaq rising 2.8 percent, supported by data that countered suggestions of a slowdown.
Both New York and mid-Atlantic manufacturing activity gauges posted unexpected gains for June. In addition, jobless benefit applications during the week ended June 10 dipped to their lowest level in nearly four months.
"The falling unemployment claims and the New York and Philadelphia manufacturing surveys all told the same story: no economic slowdown," Rupkey said.
An economy growing apace gives the Federal Reserve the leeway to raise interest rates again to thwart price pressures and inflation expectations. Currently, the market fully expects the Fed to raise rates at the end of June and has priced in about a 70 percent chance of yet another rate hike in August.
Bonds briefly trimmed losses in afternoon trade when Federal Reserve Chairman Ben Bernanke said that US inflation developments "bear watching," but that the impact of high energy costs on other prices has been limited and that the economy will adjust over time.
Those remarks sounded less hawkish than the market's worst fears and offered, if indirectly, some reassurance that the Fed would not raise rates by more than a quarter-percentage point in June.
A bigger-than-expected rise in May consumer prices reported on Wednesday - the third month in a row when the core CPI rose 0.3 percent - convinced investors that the Fed would raise its benchmark federal funds rate another quarter percentage point to 5.25 percent at its June 28-29 meeting.
Those data even prompted some talk that the Fed might raise rates by a half-percentage point in June, instead of a quarter-percentage point, the measured step that has characterised the Fed's two-year-long rate-hike path.
Consequently, Merrill "freshened" its interest rate forecasts for this year and next year, asserting that the Fed would end up "overshooting what we see currently as a neutral Fed funds rate of about 4.75 percent."
Five-year notes slipped 4/32 for a yield of 5.08 percent, while the 30-year bond slid 17/32, its yield rising to 5.14 percent.
The Philadelphia Fed report was the latest evidence of factory strength in June. The index dipped to 13.1 from 14.4, but beat market estimates around 11.3. A New York Fed survey looked even more robust.
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