Bonds take a dive

March 15, 2012

U.S. Treasuries have taken quite a battering this week, and there has been no shortage of explanations from market pundits. For some, the downturn reflects an improving economy and the pricing out of expectations for further monetary easing from the Federal Reserve. For others, the market is playing catch up after eyeing firmer inflation numbers and a better if still anemic employment backdrop.

The Fed’s statement this week lent itself to a hawkish interpretation since what few changes were made appeared positive. The bond market responded in kind, adding to a selloff that has seen ten-year note yields rise nearly 40 basis points in just over a week. George Goncalves at Nomura describes the price action:

U.S. Treasury yields had a seismic break and have finally moved this week, and boy did they move. The market blew through the range it had held for the past four months, our near-term targets and through several important technical levels, all in the space of two trading sessions.

Consumer price data on Friday have the potential to exacerbate the sell-off, says Stephen Stanley at Pierpont Securities. Analysts polled by Reuters are forecasting a 0.2 percent gain in the core measure of prices that excludes food and energy.

In the context of a Treasury market that has melted down this week, the difference between a high 0.1% rise (optically benign) and a low 0.2% advance (a little too high for comfort and not quite consistent with the Fed’s wishful thinking on inflation) could be meaningful.

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