US government debt prices ended mostly lower on Thursday, led by long-dated issues, as traders turned their focus to inflation risks from more interest rate cuts signalled by the Federal Reserve. It was a rough day for the Treasuries market as traders concluded that more Fed rate-cuts and the government's fiscal stimulus program would come at the expense of higher long-term inflation.
"As fiscal and monetary stimuli deal with the current strain in the financial markets and its effect on the economy, there are fears what they may do to inflation down the road," said Tom Sapio, a managing director at Cantor Fitzgerald in New York.
Fed Chairman Ben Bernanke said in testimony to a Senate panel that he expects US growth will be weak into mid-year but should pick up in the second half. Government data showing record exports in December and a drop in jobless claims indicated the economy may have been stronger than previously thought and supported worries that the Fed could end up easing rates too aggressively.
The sell-off in inflation-sensitive long-dated Treasuries was compounded by selling by mortgage companies that unwound hedges in anticipation of a surge in refinancing activity on lower interest rates, analysts said.
"With the 10-year yield breaking out of the range to the upside, they are going the other way and selling duration to adjust their hedges," said Carl Lantz, interest rate strategist at Credit Suisse in New York. The stampede out of long-dated Treasuries sent the 30-year bond's yield to as high as 4.69 percent, its highest since December.
Benchmark 10-year Treasury notes were down 20/32 in price at 97-13/32 for a 3.81 percent yield, compared with 3.74 percent late Wednesday. While the bond market focused on inflation risks, the stock market fell on Bernanke's remarks on weak US growth, signalling more rate cuts are on the way.
The stock sell-off intensified after Moody's Investors Services took away its AAA-rating of FGIC, which became the first bond insurer to lose the coveted top-notch rating from all three major bond rating agencies. The major stock indexes lost as much as 1.7 percent on the day, snapping a three-day winning streak. Stock losses and expectations of further declines in the federal funds rate spurred safe-haven buying of short-dated Treasuries, traders and analysts said.
Two-year Treasury notes were up 1/32 in price at 100-14/32, recovering from a modest 2/32 dip. The yield, which moves inversely to its price, last traded 1.90 percent.
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