US government bond prices fell on Wednesday as investors took a breather from subprime mortgage market worries and pushed stocks higher. Wednesday's profit-taking erased much of the previous day's advance, but not all of it. Analysts said with the market still captive to new developments on the subprime front, investors were reluctant to let go of the safety bid entirely.
"The possibility that another shoe could drop on the subprime front limits how high bond yields can go and how far prices can drop," said John Canavan, analyst at Stone and McCarthy Research Associates.
"After (Tuesday), concerns about subprime mortgage debt will allow buying on dips," Canavan said, referring to announcements by rating agencies Standard & Poor's and Moody's to downgrade hundreds of bonds tied to subprime mortgages. Still, with no fresh bad news at hand, investors shopped for stocks and turned a cold shoulder toward Treasuries.
The blue chip Dow Jones industrial average rose 0.56 percent, while the benchmark 10-year Treasury note fell 15/32 in price, its yield rising to 5.09 percent from 5.03 percent late on Tuesday. Bond yields and prices move inversely.
"The stock market weakness seen late Tuesday did not extend itself today and this, more than anything, caused bonds to slide back on the day," said Chris Rupkey, vice president and senior financial economist at Bank of Tokyo/Mitsubishi.
An early prompt for the decline in Treasury prices was the 10-year note's inability to hold gains that briefly pushed its yield below 5 percent to 4.98 percent, a one-month low, before New York trading began. Treasuries prices steadied at lower levels before getting another nudge down from comments by Philadelphia Federal Reserve President Charles Plosser.
"The late-morning breakdown (in prices) followed comments from Plosser, whose outlook for the economy was fairly strong," said Canavan. Two-year notes - which respond closely to expectations for Fed interest-rate moves - dipped 3/32 in price for a yield of 4.90 percent, up from 4.85 percent late on Tuesday.
The 30-year bond slid a full point in price while its yield climbed to 5.20 percent from 5.13 percent late on Tuesday. Swap spreads mostly narrowed. The 10-year spread shrank to 67 basis points from 66.75 basis points on Tuesday.