NEW YORK: US debt prices fell on Thursday as central banks around the globe unveiled three-month dollar loans to European financial firms, while US investors feared the Fed would keep monetary policy loose even as US inflation rose more than expected.
The European Central Bank announced a program to coordinate with the Federal Reserve and the Swiss, British and Japanese central banks to make three-month dollar tenders available to institutions in need of the currency but unable to access traditional funding sources.
"This is good for the European banking system, so we're seeing a push higher in equity prices," said Rick Klingman, a Treasury trader at BNP Paribas in New York.
"The ECB-Fed joint announcement is causing a risk-on type trade because they're providing dollar funding through year-end."
Data in the United States showed consumer prices rising more than expected in August, leading some investors to worry inflation would devalue their long bonds even as the Fed kept rates on hold until at least the middle of 2013.
Inflation concerns led to heavy selling in 30-year Treasury bonds, driving their price down more than a point.
"The Fed's kind of stuck between a rock and a hard place," said Doug Roberts, chief investment strategist at Channel Capital Research in Shrewsbury, New Jersey. "Monetary policy is going to probably remain loose, basically increasing the inflationary environment."
Benchmark 10-year Treasury notes fell 22/32 in price for a yield of 2.07 percent, up from 1.99 percent at Wednesday's close. The 10-year note briefly lost more than a point after the ECB announcement.
After trading as much as 1-10/32 points lower in price, the 30-year bond was last down 28/32 for a yield of 3.32 percent, up from 3.28 percent late on Wednesday.
Traders were also citing an article in the UK's Telegraph newspaper that quoted Li Daokui, a top advisor to China's central bank, saying China would like to sell its vast holdings of US Treasuries and use its dollars to buy assets like real estate and stocks instead.
"I heard the chatter about it," said Guy LeBas, chief fixed income strategist at Janney Mongtomery Scott in Philadelphia.
"It put a little bit of pressure on the Treasury markets right around nine o'clock.
"We were at the highest yields in about two weeks, but we ran into some pretty heavy resistance at the 2.10 percent 10-year yield level," he added.
Copyright Reuters, 2011
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