TREASURIES-More losses mark miserable week for U.S. bond market
* Yields hit 22-month highs on fears over less Fed support
* Benchmark yields set for biggest weekly rise since 2003
* Fed buys $1.46 billion in bonds due 2036-2043
* Market rout comes before next week's $99 billion in coupon debt
NEW YORK, June 21 (Reuters) - U.S. Treasuries prices fell on Friday and yields rose to their highest in over 22 months, marking a miserable week for the bond market as investors fled in the wake of a signal from the Federal Reserve that it might pare its bond purchases later this year. The market sell-off darkened the prospect for the $99 billion in coupon-bearing federal debt for sale next week following a poor $7 billion auction of 30-year Treasury Inflation-Protected Securities this week, even though some analysts said yields might be high enough to entice bargain-minded investors. "The market is very reluctant to dip back into the water. Reduced participation is likely," Jennifer Vail, head of fixed income at U.S. Bank's Wealth Management Group in Minneapolis, said about next week's Treasuries auction. In addition to Treasuries, investors further cut their holdings in corporate bonds, mortgage-backed securities and emerging market debt after Fed Chairman Ben Bernanke on Wednesday laid out the roadmap on how the U.S. central bank might scale back its $85 billion monthly purchases of Treasuries and MBS, the pillar of its current quantitative easing program, which traders have dubbed QE3. Investors pulled $508 million out of taxable U.S. bond funds in the latest week, marking three consecutive weeks of outflows, according to Lipper, a unit of Thomson Reuters. Treasuries have been hard hit as banks, hedge funds and central banks cut back on them as investments while mortgage companies dumped them as hedges on their bond portfolios in the current yield surge. "It's all one big unwind. That's been a negative for Treasuries as hedges are unwound," said Sean Murphy, a Treasuries trader at Societe Generale in New York. Almost all economists at primary dealers expect that the Fed will start pulling back on buying bonds by the end of this year, with many expecting it will begin in September. On the open market, the benchmark 10-year Treasuries notes fell nearly 1 point in price for a yield of 2.533 percent, up 11.7 basis points from late on Thursday. The 10-year yield rose as high as 2.542 percent earlier, the highest intraday level since August 2011, according to Reuters data. For the week, the 10-year yield was on track to rise 40 basis points for the biggest single-week jump since March 2003, according to Reuters data. In the mortgage-backed sector, where the Fed has been buying $40 billion a month, the yield premium on 30-year bonds that carry a 3.0-percent coupon and are backed by home loans guaranteed by Fannie Mae over five-year Treasuries grew to 2.20 percent, the highest since December 2011, according to Reuters data. Trading volume was heavy for a third straight day. ICAP, the world's largest inter-dealer broker of government debt, said $492 billion of U.S. Treasuries had traded as of 2 p.m. (1800 GMT) on Friday, 14 percent above the 20-day average of $433.941 billion at this time. Treasury options hit record volume on Thursday with 1.71 million changing hands, the CME Group said.
"BELLY" ACHE While longer-dated Treasuries have been the biggest losers during the dramatic spike in yields since April, five- and seven-year notes were the worst performers this week as these maturities, commonly referred to by traders as the "belly" of the U.S. yield curve, have been targeted by the Fed's QE3 purchases. The Fed bought $1.46 billion in bonds due 2036 and 2043 on Friday as part of its ongoing purchase program. Five-year notes were last down 18/32 in price to yield 1.428 percent, and seven-year notes fell 25/32 in price to yield 1.971 percent, both the highest yields since August 2011. Many investors had loaded up on this medium-term debt, betting the Fed would keep buying it at the current pace at least to the end of the year. For example, the PIMCO Total Return Fund, the world's biggest bond fund with about $178 billion in assets, had 1.92 percent of its money in a 0.750 percent coupon Treasuries issue due in Feb. 28, 2018 at the end of May. This issue ranked the fourth largest among its holdings at that time, according to Reuters data. The PIMCO fund share price has fallen 3.72 percent month-to-date through Thursday, bringing its year-to-date loss to 2.80 percent. Last year it earned 10.35 percent. As late as Tuesday, only one day before Bernanke's press conference after U.S. central bankers ended their two-day policy meeting, Bill Gross, who oversees the PIMCO fund, sent a message via Twitter: "All's quiet on the Eastern Front. #Bernanke must be careful to keep it so. Buy 5 yr Treasuries."