US bonds retreat

The US government debt market retreated on Thursday, as a recovery in stock markets and encouraging data on the global economy reduced the safety bid for bonds. Two-year Treasury yields rose from their record lows, a day after a stampede into bonds after Federal Reserve Chairman Ben Bernanke told US lawmakers that his economic outlook was "unusually uncertain."
While high unemployment and a fragile housing market have bogged down the year-old economic recovery, Bernanke and other Fed officials have downplayed the likelihood of a double-dip US recession.
Upbeat corporate results and a less severe drop in home resales on Thursday supported the more optimistic view, overshadowing news of a resurgence in jobless claims last week. Lower anxiety over a double-dip recession resulted in an unwinding of some safe-haven positions in bonds. traders said.
"Yields are too low. The bond market may have overshot," said Kevin Giddis, president of fixed income capital markets at Morgan Keegan in Memphis, Tennessee. Treasuries' high prices may turn off yield-starved investors in advance of next week's coupon-bearing supply, totalling $104 billion, analysts said. The benchmark 10-year note was down 14/32 in price at 104-26/32. Its yield, which moves inversely to price, was 2.93 percent, up 5 basis points from Wednesday when it neared a 15-month low of 2.855 percent.
The two-year yield stepped up to 0.57 percent after testing its all-time low of 0.5561 percent earlier. The bond sell-off widened the gap between the two-year and 10-year yield, which grows with improved sentiment on the US economy. That part of the yield curve tilted up to 236 basis points, a day after flattening to 230 basis points, a level not seen in about 10 months.
The drop in bond prices was mitigated by worries over the regulatory tests of European banks whose health has been questioned due to the region's sovereign debt problems. It is unclear how investors will interpret the results. On one hand, if nearly all 91 European banks were to meet the capital requirements set forth by regulators, investors would react skeptically, a reaction that harkens back to similar tests on US banks last year, analysts said.