NEW YORK: US Treasuries prices fell on Wednesday, sending yields to their highest level since October, as interest in safe-haven government debt waned after the Federal Reserve brightened its economic outlook and most US banks passed stress tests.
On Wall Street, stocks rose for the sixth straight day, as optimism encouraged investors to turn to riskier assets.
The unexpected degree of optimism in Tuesday's Fed policy statement pushed the long end of the curve out of its recent yield range though support at 3.25 percent. The 30-year Treasury bond was down 1-28/32 on Wednesday, pushing its yield up to 3.36 percent.
The benchmark 10-year Treasury note was down 31/32, its yield rising to 2.24 percent from 2.13 percent late on Tuesday.
On Tuesday the Fed also said the majority of the largest US banks passed the latest round of bank stress tests, meaning that they would have adequate capital even if they incurred large losses in a hypothetical, severe economic scenario.
Analysts said the higher yields, along with substantial risks in the global economy, could eventually curb selling, but bond prices remained under pressure as investors turned to riskier assets seeking richer returns.
"Equities are getting the message that they are cheap relative to bonds, which is the other side of bonds getting the message that they are extremely expensive," said Alan Ruskin, head of G10 currency strategy at Deutsche Bank in New York.
Some even argued the Fed could raise rates next year, although the Fed has thus far said it would keep its federal funds rate exceptionally low at least through late 2014.
"Our guess is the economy continues to do well and (the Fed will) raise rates sometime early in 2013," said Chris Rupkey, managing director and chief financial economist at Bank of Tokyo-Mitsubishi UFJ in a note.
Against such a backdrop, the market's reaction to the Fed "makes sense," said Jonathan Lewis, chief investment officer at Samson Capital Advisors in New York.
"We're seeing a bear steepener where shorter maturities are holding in much better than longer ones, because the Fed reiterated that the short end of the curve is safe to be in," he said, referring to the Fed's assertion that the federal funds rate would likely have to remain at exceptionally low levels at least through late 2014.
In contrast, inflation and growth expectations could drive the long end of the curve, Lewis said.
The Fed's observation that the economy has been expanding and that labor market conditions have improved "reinforced the model for the bond market that better data means good equity market performance; when risk assets like equities perform well, it's a bear steepener, so sell the long end," he said.
Traders also positioned for this afternoon's US Treasury auction of $13 billion in 30-year bonds. The Treasury sold $32 billion in three-year notes on Monday and $21 billion in reopened 10-year notes on Tuesday. The auctions will settle on Thursday, March 15.
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