Treasury debt prices fell Friday, as bond investors slashed expectations for Federal Reserve interest rate cuts, concluding that food and energy inflation may prevent the Fed from easing much further.
The two-year Treasury note's yield, which moves inversely to its price, rose to nearly three-month highs.
The yield briefly hurdled the 2.25 percent level of the Federal Reserve's benchmark target rate, telegraphing that bond traders are betting the Fed's rate easing cycle is near the bottom.
US stocks' surge curbed Treasurys safe haven appeal, further weighing on bond prices.
"Equities are not helping the matter. They continue to rally," said Jeff Hlavacek, director of fixed income trading at BNP Paribas in New York. Major stock indices were up at least 1 percent.
"The Fed is finished either here or at 2 percent for the time being" if the central bank cuts its target rate by 25 basis points at the end of April as many investors expect, he said.
Short-term interest rate futures abandoned any implied chance of a deeper 50 basis points Federal Reserve cut at the end of this month, but the likelihood of a shallower 25 basis points rate cut on April 30 remained priced in.
Treasury bond market traders "need to get the rate structure normalized based on that," which would mean 2-year note yields could move nearer to 50 basis points above the fed funds target rate, Hlavacek said.
Around noon on Friday, the 2-year Treasury note's price, which moves inversely to its yield, was down 8/32 for a yield of 2.24 percent, versus 2.11 percent late Thursday.
"There are waning expectations for aggressive Federal Reserve rate cuts. We have seen a big change in sentiment over the last couple of weeks," said Kim Rupert, managing director of global fixed income analysis with Action Economics in San Francisco. Resilient inflation pressures are causing the bond market to rethink just how low the Fed can cut the target rate, Rupert added.
Earlier this week, a report showed US producer prices accelerating to 6.9 percent year-over-year. That's one of the fastest rates since the early 1980s, driven by record highs for some foodstuffs and all-time highs for US crude oil, which hurdled $116 per barrel on Friday.
"The Fed has been working under the assumption that energy pressures are going to moderate and they have done nothing but go higher," Rupert said.
The benchmark 10-year Treasury note's price, which moves inversely to its yield, fell 27/32 for a yield of 3.83 percent, versus 3.73 percent late Thursday.