U.S. Treasuries yields rose on Wednesday after U.S. producer prices recorded their largest increase in six months in December, raising expectations that inflation may start picking up and potentially bring forward the timeline in which the Federal Reserve will start raising rates.
The Labor Department said on Wednesday its seasonally adjusted producer price index rose 0.4 percent last month, the biggest rise since June, after slipping 0.1 percent in November. The rise in prices received by the nation's farms, factories and refineries ended two straight months of declines and matched economists' expectations.
"There were some early hints of inflationary pressures, recently there has been a sense that inflation might have bottomed," said Boris Rjavinski, an interest rate strategist at UBS in Stamford, Connecticut.
Intermediate-dated debt, which is the most sensitive to Fed interest rate policy, was among the worst performers on Wednesday as traders and investors try to evaluate when the Fed is likely to increase rates from rock bottom levels.
Some traders think the Fed could move in mid-2015 while others see a hike as unlikely until at least 2016.
"The selloff is led by relatively shorter-term maturities. That kind of reaction means it's not about tapering, but if inflationary pressures are building what does that mean for the timing of the first hike from the Fed," Rjavinski said.
Five-year notes were last down 4/32 in price to yield 1.682 percent, up from 1.647 percent late on Tuesday. The notes have given back more than half of their gains made on Friday and Monday, after a weaker-than-expected employment report for December sparked a strong short-covering rally.
Benchmark 10-year notes were last down 5/32 in price to yield 2.892 percent, up from 2.869 percent late on Tuesday.
Thirty-year bonds fell 11/32 in price to yield 3.825 percent, up from 3.800 percent.
The Fed will purchase between $4 billion and $5 billion in notes due 2018 and 2019 on Wednesday as part of its ongoing purchase program. Chicago Fed President Charles Evans and Atlanta Fed President Dennis Lockhart are both due to speak later on Wednesday. The U.S. central bank will also release its Beige Book report on Wednesday, a collection of anecdotes from the central bank's business contacts across the nation, which will be watched for signs of the strength of the economic recovery.