U.S. Treasury debt prices mostly fell Wednesday as investors gave up on recent safe-haven bond buying to pile into the higher risk of stocks, as data showed a surprise pick-up in consumer spending.
Bonds traded mixed through much of the day, wobbling between the sign of economic strength from the rise in January retail sales and continued worries about the financial sector after news the largest U.S. mortgage insurer, MGIC, had a $1.47 billion quarterly loss linked to housing-market weakness.
But a late surge in stocks pushed longer-dated debt firmly into negative territory.
"Stocks had a real good close," said Mary Ann Hurley, vice president of fixed income trading at D.A. Davidson & Co in Seattle.
Analysts said a key component of the Wednesday debt flows was traders putting on curve-steepening trades to widen the gulf in yields between shorter-dated and longer-dated debt.
The benchmark 10-year Treasury note dropped 18/32 to 98 3.32 as the yield climbed to 3.73 percent. The two-year Treasury note was unchanged with a yield of 1.91 percent. Five-year notes dropped 5/32, punching up the yield to 2.73 percent. The 30-year bond dropped 1 9/32 as the yield roes to 4.53 percent.
The gap between two-year and 10-year note yields widened to 181 basis points, the steepest level for the Treasury-yield curve in over three years.
Within the steepening trade, longer-dated Treasurys were seen as under more downward pressure on Wednesday than the upward pressure seen on shorter-dated bonds, due to stronger stock markets.
"The curve keeps steepening," said Richard Gilhooly, senior U.S. bond strategist at BNP Paribas in New York. "For the time being, with the stock market up, we think it is going to be long rates that break higher" out of a recent range.
Treasurys fell early in the day after the surprisingly strong reading on retail sales last month, which briefly allayed fears that a slowing consumer sector would push the U.S. into a recession.
Data showed U.S. retail sales in January rose by 0.3 percent, but the government report showed sizable declines in key categories such as electronics, building materials and
department stores. Analysts had expected a decline of 0.2 percent.
"In the details, there are some signs of weakness," said Matthew Moore, economic strategist at Banc of America Securities in New York.
Bond investors were looking ahead for market direction from Federal Reserve Chairman Ben Bernanke, who testifies to Congress on the economy on Thursday.