US Treasury prices fall

US Treasury debt prices fell on Wednesday, ending a three-day rally as weakness in the European government bond market spilled into its US counterpart.
Benchmark yields rose by their most in a week as concerns about rising global interest rates appeared to overshadow a flight-to-safety bid earlier this week spawned by ongoing worries over the Bear Stearns hedge funds episode. US government bonds were also weighed by sales ahead of a slew of corporate bond issuance, which has already exceeded $20 billion this week.
But the main catalyst for Treasuries on Wednesday was German Bund prices, which fell after central banks in Europe signalled concerns over inflation. "What you are starting to see is a filtering of fear through the financial markets that in fact inflation will continue to move up," said Michael Yoshikami, president and chief investment strategist of YCMNET Advisors in Walnut Creek, California.
"There has been a spillover effect from Bunds into Treasuries," he added. Meeting minutes from the Bank of England indicated it might raise borrowing costs in July, while Sweden's Riksbank raised its key rate by a quarter point.
Benchmark US 10-year Treasury notes US10YT=RR were down 14/32 in price for a yield of 5.15 percent, up from 5.09 percent late on Tuesday, but well below the 5.33 percent five-year yield high set last week. Bond yields and prices move inversely.
Earlier in the session, the yield on 10-year notes had briefly hit its lowest level in two weeks as investors flitted into Treasuries in a flight to safety bid amid worries over the fallout from the troubled hedge funds managed by Bear Stearns Cos.
But the market soon gave way to selling on global inflation jitters and selling of Treasuries ahead of non-government bond deals. The benchmark Treasury note continued to carve out a new niche in the middle of a broad range between 5 percent and 5.25 percent.
"People are just reassessing where they want to be. We are just taking a breath here," said Richard Schlanger, portfolio manager at Pioneer Investments USA Inc in Boston. Wednesday's Treasuries losses interrupted a mini-rally for the market, which was hammered last week by mortgage-related selling and a growing consensus the Fed would not ease rates by year-end. This week's soft housing data, including a drop in housing loan applications reported by the Mortgage Bankers Association, revived hopes that the Fed may still trim rates this year.
US rate futures indicated that traders have priced back in a slight chance of a Fed rate cut by year-end. Just a week ago, they showed that traders were bracing for the minor chance of a rate hike. Mortgage accounts were selling Treasuries again on Wednesday and paying the fixed-leg portion of interest-rate swaps, an analyst said, which widened swap spreads substantial 2 basis points.
The declines in mortgage applications, home builder sentiment and housing starts supported the view that the US housing downturn has not touched bottom and would remain a drag on US economic growth, analysts said.
Two-year Treasury notes which are particularly sensitive to expectations for official interest rate moves, were down 2/32 in price for a 4.99 percent yield versus 4.94 percent late Tuesday. Five-year notes fell 8/32 in price to yield 5.06 percent versus late Tuesday's 5.00 percent. The 30-year bond dropped 27/32 in price for a yield of 5.26 percent, versus 5.20 percent late on Tuesday.