US Treasuries fell and yields rose on Tuesday on the view that the inflation concerns of some Federal Reserve policymakers could cause the central bank to tighten monetary conditions before year-end. Fissures among Fed policymakers have lately grown more distinct with some so-called inflation hawks sounding alarmed about higher fuel and food prices and others emphasising that the Fed is far from achieving its dual mandate, particularly its requirement to promote full employment.
Those who ring the inflation alarms have gone so far as to suggest that the Fed need not complete its planned purchases of $600 billion in US Treasuries, a phase of monetary stimulus scheduled to be done by the end of June. Others, like New York Fed Bank President William Dudley, one of the Fed's most influential policy makers, believe there is no reason for the Fed to reverse a policy designed to avoid deflation and spur employment.
Bond prices fell even though an index showed the US economy's vast services sector slowed last month, restrained in part by supply disruptions caused by Japan's earthquake. The possibility that the Fed might address a front-end collateral shortage by doing reverse repos gave the market another element of uncertainty to contemplate, McCarthy said. New FDIC fee assessment base rules implemented on April 1 left overnight funding markets with a collateral shortage that caused the front end of the curve to suffer from various dislocations, he said.
Japanese banks and other businesses that need funding over March 31 (Japan's fiscal year-end) commonly fund themselves well in advance, locking up collateral over March 31 and into the first week of April, he explained. Two-year Treasury notes fell 4/32 in price, their yields rising to 0.83 percent from 0.77 percent Monday. Treasuries erased early gains on Tuesday morning after PIMCO Chief Executive Bill Gross said on CNBC that Treasuries are unattractive at current yields. Benchmark 10-year notes fell 16/32, their yields rising to 3.49 percent from 3.43 percent late Monday.