Benchmark US Treasury yields hit their highest level this year on Tuesday after stronger retail sales, gains in equities and the Federal Reserve's acknowledgement of signs of strength in the economy eroded the safe-haven allure of US debt. The US central bank, in a statement after a regular policy meeting, said it expects "moderate" growth over coming quarters along with a gradual decline in the unemployment rate.
At its previous policy meeting in January, the Fed had said it expected "modest" growth. While the Fed did acknowledge some improvement in the labour market, it also left the door open to the possibility of undertaking another economic stimulus program - known as quantitative easing, or QE3 - and said it continues to expect to hold interest rates near zero through late 2014.
"The Fed did acknowledge the modest improvement in the labour market but were careful not to fall into the slew of better-than-expected data we've seen over the past few months leading accommodative policy to be unwound early," said Lindsey Piegza, economist at FTN Financial in New York.
Data showing the largest rise in US retail sales in five months in February reinforced the bond market's bearish cast, as did gains in the stock market for a fifth straight day. Benchmark 10-year Treasury notes traded 27/32 lower in price to yield 2.13 percent, which was the highest level since early December and up from 2.03 percent late Monday. The notes were on track for the biggest single-day rise in rates since February 3, and yields rose above a range that has dominated for several months.
"We were wondering if the bond market was just one more 'no QE3' statement from the Fed away from a breakout of the tight 30 basis point trading range of 1.8 to 2.1 percent since last November," said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York.
Thirty-year bonds traded 1-21/32 lower to yield 3.26 percent, which was the highest rate since late October, up from 3.19 percent late Monday. "Given the strength of the incoming economic data, including the upward revisions to retail sales and inventories reported today, it would be hard for the Fed to justify more bond buying now," said Paul Ashworth, chief US economist at Capital Economics in Toronto.
"We suspect that officials are happy to wait for a few months to see if the much stronger labour market data develops into a more vigorous pick-up in the growth of incomes and expenditures," he added. A US Treasury sale of $21 billion of reopened 10-year notes on Tuesday was met with solid demand, as was the sale of $32 billion in three-year notes on Monday. The Treasury will auction $13 billion of reopened 30-year bonds on Wednesday.