Prices of U.S. Treasurys slid on Monday, with the 30-year bond yield hitting a 14-month high after a brighter outlook on the U.S. economy from Standard & Poor's prompted investors to dump safe-haven government debt.
S&P raised its outlook on the U.S. rating to stable from negative, meaning the agency is now less likely to cut the world's biggest economy from a current AA-plus.
The news came as traders mulled over bond positions ahead of this week's supply of $66 billion in government debt.
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"There is a general acceptance that the economy is doing better, and on more solid footing, and at the same time that's improving the fiscal situation. The political climate in Washington is also maybe less acrimonious than it was," said Richard Gilhooly, interest rate strategist at TD Securities in New York.
But uncertainty over when the U.S. Federal Reserve could slow its $85-billion-per-month of asset purchases as the economy regains its footing helped limit losses.
Policymakers have signaled they could be looking for the exit— but Fed speakers have yet to point to a consensus on when.
On Monday, for example, St. Louis Fed President James Bullard said inflation remains low enough for the Federal Open Market Committee, the central bank's policy-setting group, to stick with its current bond buying pace.
U.S. core inflation, which excludes volatile food and energy prices, has been running under 2 percent, raising the specter of a similar deflationary spiral as that which crippled Japan for a decade in the 1990s.
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"Spot inflation hasn't delivered right now, and people don't know how long the Fed will support the market," said Aaron Kohli, interest rate strategist at BNP Paribas in New York.
This view has pummeled Treasury Inflation-Protected Securities (TIPS), which had thrived under the Fed's current bond purchase program, known as quantitative easing and aimed at reducing unemployment as well as averting deflation.