US Treasury prices drop

US Treasury debt prices fell on Thursday after the Federal Reserve raised the discount rate it charges banks for emergency loans, with losses more pronounced at the shorter end of the market. This is the first time the Fed has increased any of its key lending rates in the aftermath of financial crisis. The Fed said the discount rate would be increased to 0.75 percent from 0.50 percent, effective Friday.
While the move is small it could have a marked impact on investor psychology. "The Fed can talk all day about how the discount rate hike is technical and not a policy move, but the market sees it as a shot across the bow," said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York.
The discount rate increase added to expectations the central bank could move as soon as later this year to boost the benchmark federal funds rate from the current ultra-low level near zero. Treasuries, particularly shorter-dated notes which are more susceptible to fed fund expectations, extended losses on the news. Two-year Treasury notes traded 5/32 lower in price to yield 0.93 percent, up from 0.86 percent late on Wednesday. The yield reached to as high as 0.94 percent, its loftiest since the end of January.
Treasuries had already traded lower through the day as investors began pushing down prices ahead of next week's scheduled record sale of government debt and as manufacturing data supported views of an economic recovery. The government said on Thursday it would auction a record $126 billion in coupon debt next week, including the first sale of 30-year Treasury Inflation Protected Securities.
While the supply figures were in line with expectations, traders sought to move prices to attractive levels for the auctions. "I thought over the next few days we'd see a push to these yield levels," said Bill Bemis, portfolio manager with Aviva Investors North America in Des Moines, Iowa. "Between people getting set up for the supply, the economic data earlier and just generally light trading volumes, it seems to all be happening today."
Separate reports earlier showed unexpectedly strong producer price inflation nation-wide, robust manufacturing conditions in the Mid-Atlantic region and the 10th month of gains for a gauge of the economy's prospects. Balanced against the bond-negative news was government data showing an unexpected jump in weekly first-time claims for jobless benefits, which kept alive worries that the moribund labour market could still slow the recovery. The benchmark 10-year Treasury note traded 19/32 lower in price to yield 3.81 percent, up from Wednesday's closing yield of 3.73 percent, while the 30-year long bond traded 18/32 lower to yield 4.74 percent from 4.70 percent.