US Treasury prices slipped on Wednesday as traders' fears the Federal Reserve may raise interest rates more rapidly than anticipated offset strong results from an auction of new five-year notes.
Short-term yields touched a two-year high as the market continued to digest comments from Fed Chairman Alan Greenspan on Tuesday suggesting that any spike in inflation could prompt the central bank to tighten policy more aggressively.
"Up until the last employment report I thought for sure they were going to wait until August," said Andrew Brenner, head of fixed income at Investec US
"After Greenspan, not only do I think they're going to raise rates in June, now I tend to think they are going to go 50 (basis points)."
That possibility was enough to keep bonds in the red despite solid interest in $15 billion in new five-year Treasury notes, though the market pared losses after the government delayed the release of May producer price index data.
Many investors were worried those figures would reinforce the notion that inflationary pressures are on the rise.
In the auction, the five-year notes went at a high yield of 4.010 percent and drew bids for 2.91 times the amount on offer, above May's 2.64 level and the best result since August 2000.
By late afternoon, five-year notes were down 6/32 in price, lifting yields to 3.98 percent from 3.93 percent. The new notes were yielding 4.01 percent in when-issued trading.
The benchmark 10-year Treasury note slipped 10/32, taking its yield to 4.81 percent from 4.76 percent.
The 30-year bond lost 13/32, leaving its yield at 5.48 percent from 5.46 percent.
Two-year Treasury notes shed 4/32 in price, sending yields to 2.77 percent from 2.70 percent. Earlier, yields hit a two-year high of 2.80 percent
The futures market was also pricing in a greater risk of a half percentage point hike at the Fed's August meeting, though most analysts still expect a more measured 25 basis points at its next policy-setting meeting on June 29-30.