* Yields rise on concerns that Fed will taper in September
* Investors sell bonds, mortgage hedging adds to weakness
* Fed buys $1.59 billion bonds due 2036-2043
By Karen Brettell and Luciana Lopez
NEW YORK, Aug 19 Longer-dated U.S. Treasuries
yields rose to two-year highs on Monday, extending weakness
after their worst week in two months, as investors worried about
the effect on the market if the Federal Reserve reduces its bond
purchase program next month.
Benchmark 10-year note yields have risen by more than a full
percentage point from 1.60 percent at the beginning of May, when
Fed Chairman Ben Bernanke said the U.S. central bank may pare
back its bond purchases, surprising many investors.
Improving economic data has added to expectations that the
Fed will begin reducing purchases next month, sending 10-year
yields to near 2.90 percent on Monday. Investors who had bet on
falling yields have also had to sell those positions, adding to
"A lot of portfolios have been liquidating. As we get closer
to the tapering, clearly people want to be out of the way of
that," said Scott Graham, head of U.S. government bond trading
at BMO Capital Markets in Chicago.
More stringent capital rules for banks are also likely
reducing demand for government bonds. Lighter volumes as traders
take summer vacations, and hedging by mortgage servicing
companies, are also adding to the yield increase, Graham said.
Seven-year notes yields rose as high as 2.29
percent on Monday, the highest since July 2011. They have
increased from around 2 percent a week ago and are up from 1.05
percent at the beginning of May.
Benchmark 10-year Treasury notes yields rose as
high as 2.90 percent, also the highest since July 2011. They are
up from around 2.60 percent a week ago and from 1.60 percent at
the beginning of May.
Thirty-year bonds yields jumped to 3.91 percent,
the highest since August 2011. They have risen from 3.60 percent
a week ago and from around 2.80 percent at the beginning of May.
With little economic data, the next focus for investors is
the release on Wednesday of the Fed's meeting minutes from July,
which will be evaluated for any signs of the pace and timing of
a pullback from the $85 billion a month stimulus.
The minutes will be "one of the few opportunities to get any
type of insight into where the policy is leaning ahead of the
potential taper announcement," said Ian Lyngen, senior
government bond strategist at CRT Capital Group LLC in Stamford,
A Reuters poll showed Wednesday that a majority of
economists expect the Fed to reduce bond purchases at its Sept.
17-18 policy meeting, with a consensus expecting the U.S.
central bank would reduce purchases by $15 billion initially.
The Fed bought $1.59 billion in bonds due between 2036 and
2043 on Monday as part of its ongoing purchase program. It will
buy between $0.75 billion and $1.00 billion in debt due from
2024 and 2031 on Tuesday.
The release of the minutes will be followed by the annual
policy conference held each year by the Fed in Jackson Hole,
Wyoming, which will be on Thursday and Friday.
Fed Chairman Ben Bernanke will not be attending, unlike in
previous years. His absence comes as investors await news on who
will be the next chairman of the U.S. central bank. Fed Vice
Chairman Janet Yellen and former Treasury Secretary Lawrence
Summers are considered the front-runners.
The market is likely to remain data-dependent heading into
the influential jobs report for August, which will be released
on September 6, with housing data also likely to be scrutinized
for any signs that the back-up in rates is weighing on the
"If there is softening in the housing data, which is one of
the pillars of strength, then you have to recognize that as a
pretty significant shift. But if we can get through this period
without higher rates having a dampening effect, then we will
probably continue the move towards higher rates as the Fed
begins to taper," said BMO's Graham.