US Treasuries yields rose on Wednesday for a second day with particular weakness in longer-dated securities as investors worried that soaring energy prices would lead to inflation. Breakevens on some Treasury inflation-protected securities, reflecting inflation expectations, rose as unrest in the Middle East and North Africa sent oil prices to 2 1/2-year year peaks.
Traders worried that the Federal Reserve would let inflation get a headstart as it tries to spur economic growth. Inflation erodes the value of Treasuries over time so the 30-year bond was particularly hard hit, falling more than a point and a half, its yield rising to 4.60 percent from 4.50 percent late on Tuesday. "If the Fed waits too long on inflation, the back end of the curve will sell off the most," said Ray Humphrey, senior vice president and senior portfolio manager of government, Non-dollar sectors at Hartfort Investment Management, the latter with $159.6 billion in assets under management.
Benchmark 10-year notes fell 20/32, their yields rising to 3.56 percent from 3.48 percent on Tuesday. From a policy perspective, rising long-term rates are more problematical for the economy than higher short-term rates because mortgage and corporate finance rates are tied to long-term rates, Humphrey observed. "The market's over-arching concern is on unwanted inflation," said William O'Donnell, head of US Treasury strategy at RBS Securities in Stamford, Connecticut.
Minutes of last month's Federal Open Market Committee meeting noted the surge in oil and food prices, but showed most members of the policy group thought inflation risks from the commodity spike would be temporary. Still, the economy and views on monetary policy have shifted from where they were a year ago, Humphrey said. Inflation is still very low, but it's "more normalised and closer to the Fed's target," he said. An important goal of the Fed's stimulative monetary policy was to avert deflation.
The economy grew in the first quarter of 2011, as it did in the first quarter of the previous year. In late trade, two-year notes were down 2/32, their yields rising to 0.850 percent from 0.83 percent on Tuesday, while five-year notes fell 9/32, their yields rising to 2.32 percent from 2.27 percent late Tuesday. A squeeze on short-term rate collateral eased with repo borrowing rates and fed fund rates both rising off their lows.
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