TREASURIES-Bonds sag as Fed move raises inflation jitters
* Investors dumps bonds in favor of risky assets * 30-year bonds set for worst week since Aug 2009 * TIPS rally again, 10Y breakeven highest since 2011 * CPI posts biggest monthly rise since June 2009 By Richard Leong NEW YORK, Sept 14 (Reuters) - The U.S. Treasuries market stumbled on Friday with the 30-year bond suffering its worst week in over three years, as the Federal Reserve's latest stimulus program raised inflation worries and spurred investors to dump bonds. While the latest price data this week suggested underlying inflation trend remains tame, investors feared a third round of quantitative easing, nicknamed QE3, in a bid to reduce unemployment would make it harder for Fed policy-makers to contain inflation down the road. The Fed said on Thursday after a two-day policy meeting that it will buy $40 billion a month in mortgage-backed bonds on an open-ended basis. It also prolonged its pledge to near zero interest rates into mid-2015 from late 2014. "Everything that came out of the Fed is a bold inflation move. Rates are going to go higher, probably sometime in 2015," said Paul Montaquila, fixed income investment officer with Bank of the West in San Francisco. While regular U.S. government debt took a beating, Treasury Inflation-Protected Securities (TIPS) rallied for a second day, as traders scrambled for them as a tool to hedge against growing long-term inflation risks. The yield premiums, or inflation breakeven rates, on regular Treasuries over TIPS jumped broadly. The 10-year TIPS breakeven rate which gauges investors inflation expectations rose to 16 basis points to 2.64 percentage points, the highest since April 2011, according to Reuters data. Among regular Treasury issues, the 30-year bond shed 3 points in price at 93-15/32 with a yield of 3.086 percent, up almost 16 basis points from Thursday's close. On the week, the 30-year yield rose 27 basis points, the biggest weekly increase since Aug 2009. Benchmark 10-year notes fell more than 1 point at 97-26/32 to yield 1.866 percent, up 14.5 basis points from Thursday and 19.6 basis points from a week ago. The 10-year yield touched 1.8941 percent earlier after breaching its 200-day moving average, a key chart support level. HOPES FOR MARKET RECOVERY Friday's steep price drop led some investors to reckon the market could be poised for a rebound next week, if traders decide to book profits on this week's gains in stocks, TIPS, mortgage-backed securities and other risky assets. "Treasuries could get a bid if we see a bit of profit-taking," said Bill Irving, a portfolio manager with Fidelity Investments in Merrimack, New Hampshire, who oversees about $45 billion in bonds. On Thursday, TIPS racked up a 0.74 percent total return in the wake of the Fed's QE3 announcement, which was their biggest single-day gain since Oct 31, 2011, according to Barclays. Agency MBS backed by mortgage agencies Fannie Mae, Freddie Mac and Ginnie Mae earned a 0.30 percent total return on Thursday. That was a large one-day gain since Oct 28, Barclays said. During the market sell-off, traders received a batch of economic data which reinforced the Fed's outlook on slow growth and inflation. Industrial output fell 1.2 percent in August, the biggest decline since March 209. The Consumer Price Index rose 0.6 percent last month, the largest increase since June 2009. But traders downplayed the reading since the government estimated 80 percent of the rise came from gasoline prices, which tend to be volatile on a monthly basis.
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