* 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 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
During the market sell-off, traders received a batch of
economic data which reinforced the Fed's outlook on slow growth
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