US Treasury yields rose to session highs on Wednesday after Federal Reserve Chair Janet Yellen made comments supporting further, gradual interest rate increases.
With the US economy close to full employment and inflation headed toward the Federal Reserve's 2 percent goal, it "makes sense" for the US central bank to gradually lift interest rates, Yellen said.
"Waiting too long to begin moving toward the neutral rate could risk a nasty surprise down the road - either too much inflation, financial instability, or both," Yellen said in remarks prepared for delivery to the Commonwealth Club of California in San Francisco.
Yellen's comments come as Fed officials are viewed as taking a more hawkish tone on the economy in recent weeks, which has put pressure on bond prices.
"They are a little bit more optimistic as of late," said Gennadiy Goldberg, an interest rate strategist at TD Securities in New York.
"The Fed is basically in wait and see mode but they want to communicate to the market that the moves higher in yields are coming, and the moves higher in the fed funds rate are coming, and they don't want the market to be surprised by them in any way," Goldberg said.
Benchmark 10-year notes fell 24/32 in price to yield 2.41 percent, up from 2.33 percent late Tuesday.
Prices had weakened earlier on Wednesday after data showed that US consumer prices increased in December as households paid more for gasoline and rental accommodations, leading to the largest year-on-year rise in 2-1/2 years.
Other data showed US industrial production recording its biggest increase in two years. Rising inflation and stronger economic growth, if sustained, may push the Federal Reserve to raise interest rates at a faster pace than currently anticipated.
Some of Wednesday's bond weakness was already set before Wednesday's data, which analysts said was likely driven by positioning and not moved by any specific news headline. Yellen will speak again on Thursday on the outlook for the economy and monetary policy. The Treasury Department on Thursday will also auction $13 billion of 10-year Treasury Inflation-Protected Securities (TIPS), which will gauge concern about rising inflation as President-elect Donald Trump prepares to take office.
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