US government bond prices slipped in volatile trade on Thursday on mortgage-related selling, extending a rout that hoisted benchmark 10-year Treasury note yields to a five year peak.
Treasuries gave up the gains that resulted from Asian buying and benign comments on inflation by Chicago Federal Reserve President Michael Moskow as bids were awarded for the $4 billion sale of mortgage bonds by a Bear Stearns hedge fund, analysts said.
Bonds also were hurt by a surge in US crude oil futures to a nine-month high, which added to lingering inflation worries. Moskow told The Wall Street Journal that domestic inflation was coming down more rapidly than anticipated but still warranted close monitoring.
Treasuries have been pressured by a combination of worries over tightening credit conditions globally, abandoned hopes for a Federal Reserve interest-rate cut this year and selling by mortgage players to hedge the lengthening of their portfolios after yields jumped above 5 percent.
"The market went down about when the Bear Stearns thing was to be priced. The 10-year has outperformed to the downside. That tells me it probably was some of the Bear Stearns stuff pricing into the market," said Andrew Brenner, markets analyst at MAN Financial in New York.
"Higher oil and continuing fear of inflation is also pressuring the bond market." Benchmark 10-year Treasury notes fell 5/32 in price for a yield of 5.22 percent, versus 5.20 percent late on Wednesday. This marked a sixth straight week of price declines.
Prices hit session lows early on data showing a slight increase in the Producer Price Index, which added to fears of rising inflation, before briefly bouncing as the lower levels lured some buyers back into the market.
Benchmark yields reached as high as 5.33 percent on Wednesday, their loftiest level since 2002 and exceeding the Federal Reserve's target rate for benchmark overnight lending to banks, currently at 5.25 percent.
Yields have been pushed higher over the past week from expectations of rising interest rates globally and signs that US economic growth is outpacing forecasts - including stronger-than-expected retail sales data on Wednesday.
"There is a tug of war going on between the market sort of coming to grips with the reality of a higher interest-rate environment and data that looks like it's getting better on the economy rather than worse," said Dean Junkans, chief investment officer for Wells Fargo Private Bank in Minneapolis.
The 10-year note's yield has surged from 4.97 percent one week ago and analysts say the market is at attractive levels, but much would depend on May's consumer inflation report on Friday. Thirty-year bonds were down 8/32 in price for a yield of 5.30 percent, versus 5.28 percent on Wednesday. US interest-rate swap spreads tightened on Thursday.