US Treasuries tumble

US Treasury debt prices fell on Friday after a surprisingly strong reading of January consumer sentiment reinforced the view that the Federal Reserve will not cut official interest rates anytime soon.
Evidence of the improved consumer mood in the Reuters/University of Michigan survey added to a series of strong recent US economic reports which are rapidly erasing the notion that the Fed will cut rates in 2007.
After selling off for more than a month, the interest rate futures market is now only pricing in one rate cut by the end of this year, versus three or more that were factored in at the start of December.
"What we're seeing is that there is a great weight of data that has come in stronger than the majority of market participants and economists had expected," said Jason Evans, co-head of government bond trading at Deutsche Bank in New York. Benchmark 10-year US Treasury notes were trading 7/32 lower in price, pushing the yield up to 4.78 percent from 4.75 percent late on Thursday.
The benchmark yield hit a 2-1/2 month high of 4.82 percent on Thursday, lifted by stronger-than-expected US new home starts and Mid-Atlantic factory activity, while jobless claims fell to their lowest in almost a year.
Meanwhile, Reuters/University of Michigan said on Friday their preliminary January consumer sentiment index rose to its highest since January 2004, and was well above a forecast of analysts polled by Reuters.
"It is another piece of evidence that the consumer is probably in okay shape," said Rick Klingman, head trader on the US Treasury desk at ABN Amro in New York. Comments from Federal Reserve officials on inflation appeared to offset each other. Fed Bank of Richmond President Jeffrey Lacker said the main risk to the US economy was for inflation to surge again or not subside.
Kansas City Fed President Thomas Hoenig said that current interest rates should be able to brake inflation, in a sign that he will vote to keep policy on hold for the time being. The market largely shrugged off both sets of comments but bond prices were helped off the day's lows by the perception that the worst of the selloff may be over.
Two-year US Treasuries were trading 3/32 lower in price for a yield of 4.94 percent from 4.89 percent late on Thursday, while five-year notes were 4/32 lower in price for a yield of 4.78 percent from 4.75 percent. The 30-year bond was 10/32 lower in price for a yield of 4.87 percent.