US Treasuries slip on fears

US Treasury debt prices collapsed on Thursday as benchmark yields posted their largest one-day spike in three years, spurred by fears of tighter monetary policy world-wide. The market plunge was initiated by an unlikely source, New Zealand, whose central bank unexpectedly raised rates a day after the European Central Bank hiked rates to curb inflation.
The sell-off intensified as mortgage players unloaded Treasuries and interest rate swaps to pare their portfolio's duration, or rate sensitivity, after yields broadly moved above 5 percent for the first time since July.
"It's a collective caving in of bond bulls," said Jamie Jackson, portfolio manager at RiverSource Investments in Minneapolis. This capitulation showed even the staunchest bond bulls were giving up their long-held belief that the Federal Reserve would ease rates this year.
Ten-year notes tumbled more than a full point in price to yield 5.10 percent, 4 basis points below their earlier peak but up 17 basis points for the day. The 30-year bond fared even worse, losing nearly 2 points in price for a yield of 5.21 percent, not far from the Federal Reserve's current 5.25 percent rate target.
"You have had a lot of bad longs out there," said Mark Simenstad, head of fixed income funds at Thrivent Financial in Minneapolis.
Even PIMCO's Bill Gross, who had been an ardent bond bull, threw in the towel. The manager of the world's biggest bond fund declared on Thursday that he is now a "bear market manager," citing faster-than-expected growth world-wide. "Global growth is stronger than expected. A lot of central banks are raising rates," RiverSource's Jackson said.
While it does not have the same international market impact as the Fed, ECB and the Bank of Japan, the Reserve Bank of New Zealand's surprise rate hike supported a once minority view that the global economy is in good shape, opening the door for central banks globally to further raise rates. South Africa's central bank also raised rates on Thursday.
Worries about rising global rates hurt equities too, as investors worried higher borrowing costs might crimp corporate profits and mergers and acquisitions. Treasury trading volume was extremely heavy, nearly 80 percent above its 20-day moving average, according to ICAP.
Two-year notes, which are most sensitive to changes in the market's Fed outlook, fell 4/32 in price to yield 5.02 percent, up 8 basis points from late Wednesday. It was milestone day for five-year notes whose yields finished at 5.07 percent, rising above two-year yields for the first time since May 2006.