The US Treasuries market stumbled on Friday with the 30-year bond suffering its worst week in over three years, as the Federal Reserve's latest stimulus program raised inflation worries and spurred investors to dump bonds. While the latest price data this week suggested underlying inflation trend remains tame, investors feared a third round of quantitative easing, nicknamed QE3, in a bid to reduce unemployment would make it harder for Fed policy-makers to contain inflation down the road.
The Fed said on Thursday after a two-day policy meeting that it will buy $40 billion a month in mortgage-backed bonds on an open-ended basis. It also prolonged its pledge to near-zero interest rates into mid-2015 from late 2014. "Everything that came out of the Fed is a bold inflation move. Rates are going to go higher, probably sometime in 2015," said Paul Montaquila, fixed income investment officer with Bank of the West in San Francisco.
While regular US government debt took a beating, Treasury Inflation-Protected Securities (TIPS) rallied for a second day, as traders scrambled for them as a tool to hedge against growing long-term inflation risks. The yield premiums, or inflation breakeven rates, on regular Treasuries over TIPS jumped broadly. The 10-year TIPS breakeven rate which gauges investors inflation expectations rose to 16 basis points to 2.64 percentage points, the highest since April 2011, according to Reuters data.
Among regular Treasury issues, the 30-year bond shed 3 points in price at 93-15/32 with a yield of 3.086 percent, up almost 16 basis points from Thursday's close. On the week, the 30-year yield rose 27 basis points, the biggest weekly increase since August 2009. Benchmark 10-year notes fell more than 1 point at 97-26/32 to yield 1.866 percent, up 14.5 basis points from Thursday and 19.6 basis points from a week ago. The 10-year yield touched 1.8941 percent earlier after breaching its 200-day moving average, a key chart support level.
Friday's steep price drop led some investors to reckon the market could be poised for a rebound next week, if traders decide to book profits on this week's gains in stocks, TIPS, mortgage-backed securities and other risky assets. "Treasuries could get a bid if we see a bit of profit-taking," said Bill Irving, a portfolio manager with Fidelity Investments in Merrimack, New Hampshire, who oversees about $45 billion in bonds. On Thursday, TIPS racked up a 0.74 percent total return in the wake of the Fed's QE3 announcement, which was their biggest single-day gain since October 31, 2011, according to Barclays.