US Treasury debt fell on Friday as an easing of credit quality worries cut short this week's rally and allowed inflation fears to creep up again. With the next Federal Reserve meeting only two trading days away, investors went back to fretting over just what sort of signal monetary policy-makers might send regarding the pace of future interest rate increases. The focus is on a single word, with analysts debating whether the US central bank will retain its pledge to be "measured" in tightening monetary policy.
Many believe the phrase will remain in the statement that accompanies the Fed's rate decision. But others feel that recent signs of a pickup in inflation will force the Fed to seek more wiggle room and drop the verbiage altogether.
"We feel the risks to the bond market are that the Fed does choose next week's FOMC meeting as the opportune time to drop the 'measured' clause, with the idea being to afford the committee more future flexibility to be more aggressive should they choose to be if inflation unexpectedly ratchets higher," said Kenneth Logan, a managing analyst at IFR Markets.
Such anxiety pushed the benchmark 10-year note 10/32 lower for a yield of 4.51 percent, up from 4.47 percent on Thursday.
Fed watcher John Berry this week wrote that the Fed would keep the word, though he gave no source for the assertion. Still, analysts assume it is just a matter of time before the Fed chooses to inject more uncertainty into the rate outlook, given that the economy is proving more resilient than many expected.
In a survey of banks that deal directly with the Fed, all 19 respondents believed the US central bank would raise its benchmark federal funds rate by a quarter point for the seventh consecutive time since last June, bringing it to 2.75 percent.
But economists said they did not expect the Fed to be terribly concerned about inflation pressures at this point. A number of Fed members in recent weeks have repeated that they believe inflation remains well contained.
Many expect the Fed to pause later in the year, but three raised their year-end forecast for federal funds.
The positive flight-to-safety effect on government bonds from General Motors Corp's profit warning on Wednesday was fading, traders said.
With it went demand for Treasury bonds, with the two-year note easing 1/32 for a yield of 3.70 percent from 3.68 percent. The five-year note lost 5/32, taking its yield to 4.17 percent from 4.14 percent.
At the long end, the 30-year bond shed 28/32, driving yields to 4.82 percent from 4.77 percent.
The early economic data showed import prices rose 0.8 percent in February, though most of the gain came from energy prices. Non-petroleum prices were up only 0.2 percent on the month, while non-auto consumer goods prices rose 1.0 percent on the year, suggesting the impact of a falling dollar remains modest so far.
The University of Michigan's consumer sentiment index for March dipped to 92.9 from 94.1 in February, surprising analysts who looked for a rise to 95.0. Still, such surveys have shown scant correlation to actual consumer behaviour, with spending still running strong in the last couple of months.
Fed Chairman Alan Greenspan on Friday gave a speech on community development, but skirted mentioning the economy or monetary policy in any way that might roil financial markets.
Next week will bring major readings on US inflation and a Fed meeting that is almost certain to see interest rates rise for the seventh time this cycle.
An upside surprise in inflation would sorely test bonds and could easily cause benchmark 10-year Treasury yields to retest this week's peak around 4.58 percent on the way to last July's high at 4.64 percent.
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