US Treasury prices fall

US Treasury debt prices fell on Monday as stronger near-term economic growth outlooks drove investors to favour riskier assets like stocks over safe-haven securities like US government debt. "It is nervousness about growth and the potential for inflation which is sending the bond market lower," said Cary Leahey, economist at Decision Economics in New York.
Longer-term securities are the most sensitive to inflation fears because inflation erodes the buying power of the income from fixed-income securities. Thus, the US 30-year bonds US30YT=RR fell nearly two points, their yields rising to 4.57 percent from 4.46 percent on Friday. Stronger US job and retail figures this month have persuaded some - but not all - economists to upgrade their near-term growth forecasts.
"We have an economy recovering, a Federal Reserve saying they will keep rates lower for longer, and add to that all the supply coming to market in 2010. Throw in some inflation risk on top of that, and you tend to get a much weaker back-end," said James Caron, co-head of global rates research at Morgan Stanley in New York.
The bond market is absorbing stronger near-term economic growth forecasts, Leahey said. "There is a very significant inventory correction going on - more intense than people thought," he explained. Leahy said some people dismiss the positive impact of the inventory correction as a temporary 'sugar fix' for the economy. But if firms add inventories because they have reached a bedrock level of demand, and they start to hire workers, that suggests better consumer spending and stronger growth ahead, Leahey said. That idea is pushing up bond yields, he added.
Meanwhile, the Treasury yield curve is steepening because some investors worry strong growth will eventually lead to more inflation, Leahey said. Benchmark 10-year Treasury notes fell more than a point, their yields rising to 3.68 percent, the highest yield since mid-August and up from 3.54 percent on Friday.
Technical selling fanned the price drop after benchmark yields broke above 3.62 percent, said John Canavan, analyst at Stone & McCarthy Research Associates in Princeton, New Jersey. The rising 10-year yield triggered some mortgage-related selling as mortgage portfolios sold Treasuries to re-adjust the duration of their portfolios, several traders said.
"We've broken through the bottom of the price range that we've been holding since mid-November, so from a technical perspective that might be some motivation to go lower from here," said Ian Lyngen, senior government bond strategist at CRT Capital Group in Stamford, Connecticut. Two-year Treasury notes traded 4/32 lower, their yields rising to 0.865 percent from 0.80 percent on Friday.