By Karen Brettell
NEW YORK, Sept 14U.S. Treasuries sold off
broadly on Friday and 10-year and 30-year debt yields rose to
their highest levels since May, after the Federal Reserve's new
mortgage bond purchase program spurred investors to sell
The government bonds weakened as the new stimulus spurred
risk-taking in stocks, reducing demand for bonds, and as bond
investors feared inflation from the program.
Disappointment that Treasuries were not included in the
central bank's third round of quantitative easing added to the
selloff, traders said.
"The Fed is trying to push investors out of comparatively
low-risk assets," said Michael Schumacher, head of global rates
strategy at UBS in Stamford, Connecticut.
Treasuries were hurt as mortgage-backed debt and stocks
The Fed said that it will buy $40 billion a month in
mortgage-backed debt in an effort to reduce the stubbornly high
"I think the back end of the curve was hoping for an
extension of Operation Twist, or that there would be something
to anchor the long end of the Treasury market a little bit and
we didn't get it," said James Newman, head of Treasuries and
Agency trading at Keefe, Bruyette and Woods in New York.
Operation Twist, which involves buying long-dated debt and
funding the purchases with sales of short-dated notes, is
scheduled to expire at the end of the year.
Thirty-year bonds were the weakest performers,
falling 2-30/32 in price to yield 3.09 percent, the highest
since May 10.
Benchmark 10-year notes dropped 1-11/32 in price
to yield 1.88 percent, also the highest since May 10.
Despite the selloff, longer-dated debt will continue to be
supported by Fed purchases from Operation Twist, and new
Treasuries programs are likely still on the table, said UBS'
"There may be a little bit of disappointment that they are
not doing Treasuries, but the Fed is still taking out virtually
all the long-end duration being added by the Treasury for
the rest of 2012," Schumacher said.
"I would think they will consider doing full-blown QE in
Treasuries but not until Operation Twist is done," he added.
Treasuries also weakened as bond investors feared the new
stimulus would increase inflationary pressures, which would
reduce the value of the debt.
Inflation expectations as measured by breakeven rates on
Treasury Inflation-Protected Securities (TIPS) have risen
sharply on the announcement.
The breakeven rate on five-year TIPS jumped to 2.31 percent
on Friday, up from 2.09 percent on Wednesday, before the Fed
Short-dated Treasuries held firm on Friday, after the Fed on
Thursday also said it would hold interest rates at zero until at
least mid-2015, out from its previous guidance of late-2014.
"The front end is anchored by the exceptionally low rates
being extended through 2015, you're seeing almost no movement
whatsoever in 2s and 3s," said Newman.