U.S. Treasuries prices fell sharply on Friday after Federal Reserve Chairman Ben Bernanke signaled no new bond buying by the U.S. central bank was imminent, triggering the biggest sell-off in three months.
Although Bernanke did mention such purchases as a possibility, investors found nothing in his comments to indicate the Fed has any immediate plans to stimulate the slowing economy through an expansion of current bond buying.
For a market already at rich levels, this was an important nuance that further fueled a sell-off ignited after data earlier on Friday showed a revised picture of U.S. economic growth was not quite as weak as expected in the second quarter.
Although the Fed did say on August 10 it would use cash from maturing mortgage bonds it holds to buy more government debt, the market was gearing up for even more quantitative easing due to a poor run of economic indicators in recent weeks.
"Apparently there was a lot of unfounded hope that Bernanke was going to indicate that additional quantitative easing was going to take place sooner rather than later," said Mary Ann Hurley, vice president of fixed-income trading at D.A. Davidson & Co in Seattle.
"He clearly indicated that it will happen if needed, and that 'if needed' is very important."
The 30-year long bond was down three points in price on the day, yielding 3.67 percent versus Thursday's close of 3.51 percent.
Broadly speaking, the bond market was on track for its biggest one-day sell-off in three months, based on the rise in 10- and 30-year yields.
However, even if the sell-off holds, the 30-year bond yield would only be about one basis point higher on the week, reflecting the intensity of the rally in previous days.
The benchmark 10-year note fell more than a point and was last down 1-14/32 in price, yielding 2.65 percent versus Thursday's close of 2.48 percent.
If the sell-off gains momentum, traders will be watching to see if support holds at 2.67 percent in 10-year notes.
The ferociousness of the day's losses refocuses attention on recent debate over whether the market is over-priced or if a bond bubble has developed.
Though the Treasury market had benefited from seemingly insatiable appetite for bonds among domestic and foreign long-term investors, many have questioned whether there was much value in government debt at these peaks.
Some say current bond prices factor in too great a possibility the U.S. economy will dip back into recession or become mired in a prolonged deflationary period of falling prices, growth and business activity.
"We are short in duration and well underweight Treasuries, so we obviously are disagreeing with the prices as they currently stand," said Andrew Johnson, managing director, chief investment officer for investment grade strategies at Neuberger Berman in Chicago, which has $79 billion in fixed income assets under management.
"The most likely outcome is that this is a soft patch in the economy and that the continued easy monetary policy will ultimately work its magic."
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