US Treasuries fell on Monday and benchmark yields approached 3 percent as worries over the future of the Federal Reserve's $600 billion bond program unleashed a wave of selling to close out bullish bets. The sell-off was compounded as bond dealers got rid of holdings of government supply bought during last week's $72 billion quarterly refunding, analysts said.
Longer-dated government debt in the cash and futures markets broke another series of chart supports, portending even higher yields and further market losses. Short-dated yields rose to their loftiest levels in two months. Treasuries have weakened in volatile trade since the Fed announced on November 3 it would purchase more US government debt in its second round of quantitative easing designed to spur the economy, known as QE2.
"The market is still deeply concerned about the aftermath of QE2 in terms of yields going through a lot of support levels and stops being hit," said Paul Horrmann, broker at Tradition Asiel Securities in New York. Adding to the bearish tone was the announcement by a group of Republican economists and financial services executives that it would launch a campaign this week calling on Fed Chairman Ben Bernanke to drop the bond-buying plan. The Wall Street Journal reported that the group was coordinating with lawmakers and political strategists.
"Domestic politics getting involved in monetary policy creates additional uncertainty," said John Briggs, US interest rate strategist at RBS Securities in Stamford, Connecticut. Stop losses placed on the QE bets have sparked waves of selling, which in turn have hit trigger levels on more trades, since Friday.
The yield on benchmark 10-year notes blasted past support levels at 2.90 percent late Monday, reversing an earlier retracement in the yield. The notes last traded at a yield of 2.96 percent, within striking distance of 3 percent, a level not seen since July. In the futures market, the December T-note lost more than a point, falling below a key support at 124-17/32.
"There's a lot of people long and wondering why at 2.90 percent the market isn't rallying or having some kind of bid in terms of direction," Horrmann said. The 10-year notes yields could next test the 3 percent to 3.08 percent area, he said. Some analysts also said bonds were hurt by a Moody's report warning that permanent implementation of the Bush-era tax cuts could worsen the US fiscal deficit in the long run, undermining the United States' ability to repay its debt.
Thirty-year bonds fared even worse than 10-years with yields pushing above their key 61.8 percent Fibonacci retracement levels. The long bonds briefly shed 2 points in late trading to yield 4.40 percent, the highest level since May. The 30-year yield has surged almost 50 basis points in eight sessions since the Fed's bond-buying statement on November 3.
"The long bond had another rough day. It just got uglier this afternoon," said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott in Philadelphia. The technical factors overshadowed mixed data on Monday on US retail sales and regional factory activity. Bank analysts maintain, however, that the market should stabilise as the Fed continues its purchase program, which has only just begun.
On Monday, the Fed bought $7.9 billion in medium-term Treasuries, part of its intended $105 billion total purchase of government debt through mid-December. "The Fed's buying every day, which should help stabilise the market," said Briggs of RBS Securities.