Short-dated US Treasury yields at biggest one-day jump down in 25 years

Short-dated US Treasury yields experienced their biggest one-day slip in 25 years on Monday as prices, moving inversely to yields, tumbled on the view that the Federal Reserve would raise interest rates later this year to thwart inflation pressures.
Treasuries prices fell across the maturity spectrum, but short-dated issues, which are most sensitive to potential shifts in monetary policy, posted the steepest losses. Trades where investors sold short maturities and bought longer-dated securities narrowed the difference between short- and long-term yields to 128 basis points in late trade from 154 basis points late on Friday.
Two-year yields rose to 2.75 percent, their highest level since early January. "This is really a yield curve flattener trade put on in response to hawkish rhetoric from Federal Reserve officials designed to burnish their anti-inflation credentials, which were shot when the Fed rescued Bear Stearns," said William Sullivan, chief economist at JVB Financial Group in Boca Raton, Florida.
The losses in 10-year notes were milder than those among the shortest-dated Treasuries. "In theory, the anti-inflation rhetoric is mildly friendly to medium and long-term Treasury debt," Sullivan said.
Dallas Federal Reserve Bank President Richard Fisher said on Monday that a weak dollar could create a "negative feedback loop" spurring inflation and sapping growth. Fisher, who dissented at the last three Fed meetings in favour of either a smaller reduction in interest rates, or no change at all, said emergency Fed measures to thaw credit markets and prevent financial markets from freezing up had won some breathing space, and attention should turn to inflation.
Short-term interest-rate futures fell, reflecting higher implied prospects for a Fed rate hike in the fourth quarter. Still, Sullivan scoffed at the notion that the Fed would raise interest rates this year.
News that investment bank Lehman Brothers planned to raise $6 billion to boost its capital base, a much higher-than- expected index of pending home sales, and a decline in crude oil prices, which helped to stabilise the US stock market, also hurt Treasuries, depleting the safe-haven bid for US government debt.
Benchmark 10-year Treasury notes fell 23/32 in price, their yields rising to 4.02 percent from 3.93 percent late on Friday. Two-year Treasury notes fell 21/32, their yields rising to 2.73 percent from 2.39 percent on Friday.
Also weighing on Treasuries this week is the pending auction of $11 billion of reopened 10-year Treasury notes on Thursday. Traders often try to cheapen bond prices ahead of such an auction.
Five-year Treasury notes fell 30/32 in price, their yields rising dramatically to 3.40 percent from 3.19 percent late on Friday. Thirty-year bonds slipped 9/32, their yields edging up to 4.64 percent from 4.63 percent late Friday.