US Treasuries prices slid on Tuesday as traders interpreted Fed Chairman Alan Greenspan's optimism on the economy as a signal that the central bank could raise interest rates more quickly than anticipated.
Speaking before the Senate Banking Committee, the Federal Reserve chief said the US economy had entered a self-sustainable expansion that was generating some price increases, but not enough to threaten the recovery.
As Greenspan completed his question-and-answer session, the benchmark 10-year note had lost 22/32 in price, lifting its yield to 4.45 percent from 4.36 percent late on Monday and still a long way from the 4.88 percent high seen just last month.
"The bond market had been thinking that the weak economic numbers that we've seen would cause the Fed to think twice about raising rates," said Gary Thayer, chief economist at A.G. Edwards & Sons in St. Louis.
Compounding the pain for bonds, Microsoft Corp, the world's largest software maker, said on Tuesday it would begin issuing a quarterly dividend, start a four-year share buyback plan and issue a special dividend to shareholders.
The announcement was expected to boost equity futures and could further hurt Treasuries overnight.
US economic data continued to point to a slowing US economy, with a housing report on Tuesday showing construction starts for June dived 8.5 percent to a much-lower-than expected 1.802 million. Permits for new home construction declined 8.2 percent.
But Greenspan's optimistic forecasts offset the housing decline, sending the two-year note down 6/32 in price and lifting yields to 2.62 percent from 2.52 percent on Monday. The five-year note eased 16/32, leaving its yield at 3.67 percent from 3.56 percent.
At the long end of the curve, 30-year bonds shed 29/32, taking yields to 5.17 percent from 5.11 percent.
Short-term interest rate futures slipped to reflect a 70 percent chance the Fed will raise rates by another quarter point at its August 10 meeting, to 1.5 percent, from a 66 percent chance before Greenspan's testimony. Futures still suggest a year-end fed funds rate close to 2 percent.
Other data on Tuesday suggested consumer spending still had not picked up after tailing off sharply in June. The ICSC/UBS measure of chain store sales rose a slight 0.2 percent last week and annual growth slowed to 3.3 percent, its lowest since August last year.