NEW YORK: US Treasuries sold off broadly on Friday and 30-year bond yields rose to their highest levels since May, after the Federal Reserve's new bond purchase program focused on mortgage-backed debt at the expense of government bonds.
The debt also weakened as the new stimulus spurred risk-taking in stocks, reducing demand for bonds, and as bond investors feared inflation.
The US central bank said on Thursday it will buy $40 billion a month in mortgage-backed debt in an effort to reduce the stubbornly high jobless rate.
"I think the back-end of the curve was hoping for an extension of Operation Twist, or that there would be something to anchor the long end of the Treasury market a little bit and we didn't get it," said James Newman, head of Treasuries and Agency trading at Keefe, Bruyette and Woods in New York.
Operation Twist, which involves buying long-dated debt and funding the purchases with sales of short-dated notes, is scheduled to expire at the end of the year.
Thirty-year bonds were the weakest performer, falling 1-24/32 in price to yield 2.03 percent. The yields earlier rose as high as 3.05 percent, the highest since May 10.
Benchmark 10-year notes dropped 25/32 in price to yield 1.82 percent, after earlier rising to 1.84 percent, the highest since Aug. 21.
Treasuries pared some price losses after data showed that consumer prices rose by the most in three years in August, and that retails sales also increased in the month.
Short-dated Treasuries held firm on Friday, after the Fed on Thursday also said it would hold interest rates at zero until at least mid-2015, out from its previous guidance of late-2014.
"The front-end is anchored by the exceptionally low rates being extended through 2015; you're seeing almost no movement whatsoever in 2s and 3s," said Newman.
Inflation expectations also continued to rise on Friday, as some investors feared that the Fed's new program would increase price pressures.
The breakeven rate on five-year Treasury Inflation-Protected Securities (TIPS) jumped to 2.31 percent on Friday, up from 2.09 percent on Wednesday.
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