U.S. bonds down as QE3 timing reassessed

NEW YORK Thu Mar 1, 2012 3:58pm EST

A firefighter raises flares as he protests in front of the parliament in Athens February 28, 2012.  REUTERS/John Kolesidis

A firefighter raises flares as he protests in front of the parliament in Athens February 28, 2012.

Credit: Reuters/John Kolesidis

NEW YORK (Reuters) - U.S. Treasury debt prices fell on Thursday as a pushback in expectations on when the Federal Reserve might launch another round of monetary easing continued to weigh on the market and riskier assets drew money away from safe-haven debt.

Testimony by Federal Reserve Chairman Ben Bernanke on Wednesday had initially sparked selling when his remarks failed to hint at a new round of quantitative easing, or QE3.

And Bernanke's question and answer session with the Senate Banking Committee on Thursday did not change that impression.

"There's a reassessment of where the Fed is going, and some long positions are getting liquidated," said Kevin Flanagan, executive director and fixed-income strategist at Morgan Stanley. "The market felt heavy in an environment of non-imminent QE3. That doesn't mean they're not going to give you QE3, but the market had priced it in as coming sooner, rather than later."

Stocks rose as investors focused on positive jobs numbers among a mixed bag of data.

The government said U.S. jobless claims edged lower in the latest week, holding near four-year lows, suggesting the labor market was gaining momentum. On the other hand, the Institute for Supply Management said its index showed the pace of manufacturing growth slowed in February.

A decision by the International Swaps and Derivatives Association that Greece's recent moves to prepare for a debt restructuring had not triggered a payout on credit default swaps also damped demand for Treasuries.

"If you're not going to have a CDS event provoked, there's less need for safe-haven debt so you might as well sell some Treasuries," said Cary Leahey, managing director and senior economist at Decision Economics in New York.

The ruling from ISDA also contributed to the generally better environment for peripheral European debt while the traditional safe havens, U.S. Treasuries and German bunds, sold off, said Eric Stein, vice president and portfolio manager at Eaton Vance Investment Managers in Boston.

Benchmark 10-year notes traded 17/32 lower in price, and their yields rose to 2.03 percent from 1.97 percent late on Wednesday. The notes were on track for the biggest two-day rise in yields since February 2-3.

"There was a large liquidation post the Bernanke speech when no additional comments on quantitative easing were included in that speech. Dealers and investors are net long and what we saw was a significant amount of profit taking," said Scott Graham, head of government bond trading at BMO Capital Markets in Chicago.

The 30-year bond fell 1-6/32 to yield 3.15 percent from 3.09 percent late Wednesday.

Still, Treasuries have not broken out of a range in place since early November, analysts noted.

"Many people are taking profits because you had a move from a little over 2 percent down to 1.9 percent," Leahey said of the yield on 10-year. "There's been no significant change in the range so in terms of the technical behavior of the market, this move is not a game-changer."

(Additional reporting by Ellen Freilich; Editing by Leslie Adler)