* Yields rise to highest levels since August 2011
* Selloff seen complicating $7 bln, 30-yr TIPS auction
* Fed to buy $2.75 bln - $3.50 bln notes due 2020-2023
* MOVE volatility index rises to highest in a year
By Karen Brettell
NEW YORK, June 20 Benchmark U.S. Treasuries
yields rose to their highest in almost two years Thursday after
Federal Reserve Chairman Ben Bernanke said Wednesday U.S. growth
was strong enough for the Fed to start slowing its stimulative
bond purchases later this year.
Bernanke downplayed concerns about falling inflation, saying
that the Fed expects price pressures to rise back towards its 2
percent target and that the jobless rate should continue to
decline to around 7 percent next year, by which point bond
purchases are likely to end.
The statements were more hawkish than some had expected and
promoted broad selling across bonds, with five- and seven-year
notes suffering the most. Selling continued overnight, with
benchmark 10-year notes yields breaking above technical support
to trade at their highest levels since August 2011.
"(The Fed has) begun to think about removing accommodation,
as opposed to a one-way message that appeared to the market of
accommodation as far as the eye can see," said Jim Vogel, an
interest rate strategist at FTN Financial in Memphis Tennessee.
Yields came off their overnight highs in U.S. trading and
fell slightly after data showed that the number of Americans
filing new claims for unemployment rose more than expected last
week, but not enough to signal a material shift from the recent
pace of moderate job growth.
Benchmark 10-year notes were last down 12/32 in
price to yield 2.41 percent, after earlier rising as high as
2.47 percent overnight, the highest since August 2011. In
overnight trading, the yields cracked above support at 2.39
percent, a level last reached in March 2012.
Five-year notes fell 6/32 in price to yield 1.30
percent, after earlier increasing to 1.36 percent, the highest
since August 2011. Thirty-year bonds dropped 23/32
in price to yield 3.46 percent, after trading as high as 3.53
percent, the highest since September 2011.
The Fed will buy between $2.75 billion and $3.50 billion in
notes due from 2020 to 2023 on Thursday as part of its ongoing
Reduced appetite for bonds may complicate the Treasury's
auction of $7 billion in a 30-year Treasury Inflation-Protected
Securities (TIPS) reopening on Thursday.
TIPS, which are typically less liquid than other Treasuries,
have borne the brunt of some of the heaviest selling of U.S.
government debt as investors are less concerned that Fed policy
will add to price pressures.
Yields on 10-year TIPS traded at their highest since October
2011 on Thursday, at 28 basis points. Concerns about inflation
had pushed the yields into negative territory. That has since
reversed for 10-year bonds as inflation readings fall and on
higher expectations that the Fed's bond purchase program will be
Data will continue to be scrutinized for signs of further
economic momentum, though the recent selloff suggests that more
bond investors agree with Bernanke that risks of another
slowdown have fallen.
"Right now people are pricing a tapering occurring some time
before the end of the year, but certainly if all of a sudden you
get some bad economic data you could see a rally in the market
pretty hard," said Jason Rogan, managing director of Treasuries
trading at Guggenheim Partners in New York.
Some investors are also worried that markets have become
increasingly comfortable with the Fed's stimulative purchases,
and that the longer they run, the more volatile an exit from the
stimulus measures will be.
Volatility measures jumped on Wednesday to their highest
levels in around a year. The Merrill Lynch MOVE index
, which estimates future volatility of long-term
bond yields, increased to 86.9. It is up from a multi-year low
of around 50 at the beginning of May.