Treasuries tumble

US Treasury bond prices fell sharply on Monday as investors gasped at another record round of new debt auctions and fretted over the possible timing of a Federal Reserve policy reversal. Solid results for a sale of $7 billion in five-year inflation-protected-notes did not assuage these concerns, while fears of a more vocal exit strategy from the Federal Reserve added to the selling pressure.
In afternoon trade, benchmark 10-year notes had dropped 14/32 for a yield of 3.54 percent, up five basis points and their highest level in about two months. The 30-year bond was down a full point. "The big overarching theme is supply," said Ian Lyngen, senior government bond strategist with CRT Capital Group in Stamford, Connecticut. In addition to TIPS, the Treasury borrowed $29 billion in three-month bills and $30 billion in six-month bills.
Bonds were actually off their lows for the day, helped by losses in a volatile stock market, where major averages were down about 1 percent earlier in the session. "We're totally equities-driven," said a trader at a US primary dealer. "The market was under pressure all day when stocks were positive and now we've reversed" some losses.
After Monday's debt sales, the Treasury will sell $44 billion in two-year notes on Tuesday; $41 billion in five-year debt on Wednesday and $31 billion worth of seven-year notes on Thursday. Increasing speculation over the Fed seeking a semantic change to signal tighter policy down the road bogged down Treasuries for a second straight session. In particular, traders are worried the Fed will drop or modify its commitment to keeping rates low for an "extended period" after news reports to that effect last week.
Short-term interest rate futures implied traders are pricing in the chances of the central bank raising rates in the second quarter of 2010 rather than the third quarter. Chatter about the Fed's policy-setting Federal Open Market Committee hinting at an eventual rate increase is premature, some analysts said. The United States still faces downside risks despite recent signs of recovering from the worst downturn in 70 years. Many analysts believe this will prevent the Fed from raising rates until the second half of 2010 at the earliest.