US Treasury debt prices fell on Thursday, erasing the previous session's sharp gains, on doubts whether a softening of the Federal Reserve's tone on inflation would produce a rate cut soon. Perceived chances of a rate cut by the end of June, as shown by US short-term interest rate futures, faded to about 32 percent from about 50 percent just after the Fed's policy statement on Wednesday.
Worries about persistent US inflation drove investors to sell longer-dated bonds. As inflation erodes bond values over time, long maturities' prices fall most in an inflationary environment.
"Core inflation remains entrenched at uncomfortable levels which will push long-end yields higher," said T.J. Marta, fixed income strategist with Royal Bank of Canada Capital Markets in New York. The 30-year bond's price briefly dropped more than a full point on the day, lifting its yield to the highest since late-February.
Bond investors who had seized on Wednesday's Fed statement hint that the central bank is now unlikely to raise interest rates further, still favoured short dated notes over long maturities. Short maturities such as the 2-year note respond closely to expectations for central bank rate moves.
"It's a response to the Fed changing that tightening bias," said Rick Klingman, head trader on the US Treasury desk with ABN Amro in New York. "From the minute the Fed statement came out we've seen a pretty good steepening in the curve," he said.
A steeper yield curve occurs when long maturities' yields widen the gap above those of short maturities. Two-year notes were down 3/32 in price on the day, yielding 4.59 percent. The benchmark 10-year note's price fell 13/32 push its yield up to 4.59 percent. The 30-year long bond was down 30/32 in price, yielding 4.78 percent. Earlier, the yield had risen as far as 4.79 percent, its highest since February 23.
Though the Fed's decision on Wednesday to leave its benchmark interest rate unchanged came as no surprise, its decision to drop a reference in its statement to the possibility of "additional firming" of rates caught traders off guard.
In the wake of the Fed statement on Wednesday, yields on two-year notes fell below those of benchmark 10-year Treasuries, "normalising" the yield curve for the first time in more than seven months.
Several bond analysts said on Thursday they expect the gap of 10-year note yields above 2-year yields to widen to about 20 basis points within roughly three months.