Tough talk on inflation by Federal Reserve Chairman Ben Bernanke kicked Treasury prices lower on Monday as the market decided that another Federal Reserve rate hike at the end of June looked likely.
Treasuries surrendered some of last week's gains, which followed a weaker-than-expected US jobs report that pointed to a slowing economy and a possible pause in the Fed's monetary tightening campaign. On Monday, higher oil prices and a weaker stock market also seemed to point in the direction of slower economic growth.
However, Bernanke asserted that the Fed would be vigilant on inflation, which bond investors read as a suggestion that the central bank could raise rates in late June to vaccinate the public against inflation expectations.
After Bernanke spoke, benchmark 10-year notes finished down 7/32 in price for a yield of 5.02 percent from 5.00 percent late on Friday.
Two-year notes fell a sharp 4/32, their yields soaring to 4.98 percent from 4.92 percent on Friday.
"The day had been very quiet - following Friday's employment report - until Bernanke's comments," said John Canavan, market analyst at Stone and McCarthy Research Associates in Princeton, N.J.
At a central bankers' panel discussion, Bernanke said that the way to prevent increased energy and commodity prices from leading to persistently higher rates of inflation is to anchor the public's long-term inflation expectations.
"Bernanke's comments made clear that the Fed would be vigilant to make sure the recent pattern of elevated monthly core inflation readings is not sustained," Canavan said. "The mere fact that Bernanke chose to emphasise inflation, rather than potential economic weakness, got the market's attention."
US short-term rate futures plunged after the hawkishly construed comments from Bernanke pushed up the implied chance that the Fed would raise rates in June.
Fed funds futures showed up to a 76 percent chance of a 17th consecutive rate increase from the Fed in June, up from 48 percent on Friday, when the weak May payrolls report persuaded many dealers that the Fed would pause in June.
Bernanke said that core inflation had reached levels that, if sustained, would be at or above the upper end of the range he viewed as consistent with price stability.
Bernanke also said that anchoring long-term views on inflation requires a consistent pattern of policy responses.
That suggested to the market that the US central bank would raise the benchmark federal funds rate to 5.25 percent in late June from 5 percent now.
In earlier trading, a jump in the "prices paid" component in the US service-sector report from the Institute for Supply Management (ISM) kept Treasury prices under pressure.
The ISM price paid measure has risen 28 percent since March as business costs have climbed on high energy and other commodity prices, analysts said.
Still, the overall ISM non-manufacturing index declined in May, though it still reflected economic expansion.