Profit-Taking Lifts Yields from 60-Year Lows

U.S. Treasury debt prices fell on Wednesday as traders booked profits from a recent rally and higher stocks undermined the safe-haven value of U.S. government debt.

Benchmark yields had dipped to 1.908 percent on Tuesday, marking the lowest level in at least 60 years, as worries over the eventual outcome of the European debt crisis and expectations the Federal Reserve will intervene to push down long-term interest rates drove buying.

The rally lost some of its steam on Wednesday, however, with benchmark 10-year Treasury notes US10YT=RR trading 15/32 lower in price to yield 2.03 percent, up from 1.98 percent late Tuesday, while the 30-year bond US30YT=RR dropped 1-15/32 in price to yield 3.35 percent from 3.27 percent.

We are seeing some profit-taking after the 10-year yield made a new record low yesterday, and stocks are recovering a little bit from yesterday's opening slide and are better this morning, said Kim Rupert, managing director of global fixed income analysis at Action Economics LLC in San Francisco.

Expectations that U.S. President Barack Obama is planning some $300 billion in tax cuts and government spending as part of a job-creating package to be unveiled on Thursday also helped cut any safety bid for bonds. For details see [ID:nN1E78524D].

U.S. stocks gained more than 1.5 percent on Wednesday as investors were willing to take on more risk on optimism that a ruling by Germany's top court will smooth the way for Germany to participate in bailout packages that are expected to help ease the European debt crisis. [ID:nL5E7K70Q9]

While longer-dated Treasuries fell on Wednesday, losses were limited by expectations the Federal Reserve will go ahead with a program to extend the duration of its Treasuries portfolio, probably by selling shorter-dated maturities and buying longer-dated bonds.

The program, dubbed Operation Twist, is expected by some analysts to be announced as soon as the Fed's next policy meeting on Sept. 20-21.

As risk assets bounce Treasuries are declining, but price weakness remains corrective, said MacNeil Curry, technical strategist at Bank of America Merrill Lynch in New York.

The data calendar was relatively thin on Wednesday, although market players will parse through the Fed's Beige Book, an anecdotal narrative of business and economic conditions across the nation, due for release at 2 p.m. (1800 GMT).

Of greater interest is a speech on the U.S. economic outlook on Thursday at 1:30 p.m. (1730 GMT) from Fed Chairman Ben Bernanke. Special attention will be paid to whether he drops any hints as to the potential implementation and/or timing of Operation Twist.

Chicago Fed President Charles Evans said on Wednesday that inflation was expected to stay low, and the U.S. central bank should ease monetary policy further to help the job market. [ID:nN9E7J700W]

Later on Wednesday afternoon, San Francisco Fed President John Williams will also speak on economic policy and the economic outlook. [ID:nN1E75N0CX]