By Min Zeng
Treasury bonds fell Friday after a two-day price rally, as anxiety continues to mount that the Federal Reserve would pull back from buying bonds in coming months.
In recent trading, the price of the benchmark note fell by 8/32, pushing up its yield to 1.893%, according to Tradeweb. The 30-year bond's price fell by 19/32, yielding 3.115%. Bond prices move inversely to their yields.
The central bank's steady purchases--$45 billion per month in Treasury bonds since the start of the year--has been a major factor holding bond yields near historic lows. Any signal that the bond market may lose support of a major buyer could send bond prices tumbling and pushing up yields.
The angst has built up this month and got a further boost Thursday afternoon from Federal Reserve Bank of San Francisco President John Williams. Mr. Williams argues that the central bank may taper off buying Treasury bonds as soon as this summer.
Mr. Williams doesn't vote on interest-rate policy this year. Yet he had advocated for more monetary stimulus to support the economic growth, a stance known as being an interest-rate "dove." Thursday's comment indicated a significant shift in his stance toward the "hawk" camp--where some Fed officials have pushed for withdrawal of monetary stimulus to prevent runaway inflation risk in the longer term.
"Fixed-income investors are getting increasingly nervous on the Fed outlook," said Anthony Cronin, a Treasury bond trader at Societe Generale SA.
After falling to this year's low of 1.61% on May 1, the 10-year note's yield has climbed, touching a two-month peak of 1.985% on May 15.
Investors will closely scrutinize Fed Chairman Ben Bernanke next Wednesday when he is scheduled to testify before lawmakers on economic outlook and monetary policy.
Mr. Bernanke has long been a key force of the dove camp, pumping liquidity into the economy. Last week though, he took note of the potential market bubble driven by the Fed's generous cash provisions, which has sent U.S. stocks to record highs this month and U.S. junk bond yields to all-time lows.
"In light of the current low interest rate environment, we are watching particularly closely for instances of 'reaching for yield' and other forms of excessive risk-taking, which may affect asset prices and their relationships with fundamentals," Mr. Bernanke said last week.
Traders said Treasury bonds would sell off next week if Mr. Bernanke highlights this risk again, which could raise speculation that the Fed chief could edge closer to scaling back on bond buying.
Still, some bond bulls remain skeptical that the Fed will move to cut back on bond purchases before the end of the year given the still uncertain economic outlook.
Bond prices rallied in the previous two sessions fueled by disappointing economic releases. Gauges of manufacturing activities in Mid-Atlantic region fell and initial jobless claims rose, pointing to still moderate recovery in the labor market.
Jan Hatzius, chief U.S. economist at Goldman Sachs Holdings Inc. and one of the most high-profile Fed watcher on Wall Street, said in a note to clients Friday that tapering off bond buying will not happen this year.
Mr. Hatzius believes the Fed will gradually taper off bond buying, starting in the first quarter of 2014, presumably to be announced at the December 2013 Fed policy meeting.
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