The 30-year Treasury bond's price fell more than a full point Tuesday in the aftermath of a stronger-than-expected U.S. retail sales report and data showing persistent import price inflation.
The 30-year Treasury bond's price, which moves inversely to its yield, fell 1-7/32 for a yield of 4.62 percent.
Long-maturity fixed income securities are particularly vulnerable to inflation pressures, which erode bond values over time.
Treasury debt prices fell broadly after retail sales hinted that US economic weakness might not be as pronounced as anticipated, while import prices underscored the persistent inflation threat to bonds.
A key gauge of money market strains and investors' risk aversion, the so-called "Ted spread" between 3-month dollar-denominated London interbank offered rates or Libor and 3-month U.S. Treasury bill yields, ebbed to its lowest levels since the global credit market crisis first exploded in August, which diminished Treasurys' safe haven appeal.
Bond investors took note of comments by Federal Reserve Chairman Ben Bernankethat underscored the central bank's determination to continue extraordinary liquidity measures to ease strains for financial institutions.
But the main market catalyst was economic data.
Treasurys sold off because retail sales offered "some encouragement perhaps that in the second quarter the consumer has not rolled over and died yet," said Jay Mueller, senior portfolio manager with Wells Capital Management.
Consumer spending accounts for about two thirds of economic activity.
Total sales at retailers weakened modestly in April, the government reported, but outside the hard-pressed auto sector they showed more resiliency than many analysts had anticipated, rising 0.5 percent.
"The ex-autos number was stronger than expected and they also revised last month upward, so these data suggest that first quarter GDP will be an upward revision, which will push us a bit further away from recessionary type territory," he added.
The benchmark 10-year Treasury note's price, which moves inversely to its yield, fell 15/32 for a yield of 3.86 percent versus 3.80 percent late Monday.
"Inflation, as seen in the import prices, still rears its ugly head and will remain a concern concentrated in the long end of the Treasury market," said Doug Roberts, chief investment strategist with Channel Capital Research in Shrewsbury, N.J.
U.S. import prices rose 1.8 percent in April, slightly above economists' forecast rise of 1.7 percent, lifted by higher prices for oil and other imports.
On Tuesday, U.S. light, sweet crude oil futureshit a new record near $127 per barrel.
The already slim prospects of a rate cut appeared to fade further after the economic data. Short-term interest rate futures showed the implied chance of a 25 basis-point rate cut by the Federal Reserve at its June policy meeting diminished to 8 percent versus about 12 percent earlier on Tuesday.
"Markets are paring back the potential for a rate cut and marking up the possibility of a rate hike toward year end," said Kim Rupert, managing director of global fixed income analysis with Action Economics LLC in San Francisco.
Short maturities respond particularly closely to expectations for the central bank's actions on interest rates.
The 2-year Treasury note's price was down 5/32 for a yield of 2.40 percent, versus 2.32 percent late Monday.
Bond investors are watching closely to see the effectiveness of the Fed's unconventional measures to ease the lending crunch.
Treasurys traded fairly steady after Federal Reserve Chairman Ben Bernanke said that the Fed's extra liquidity measures have helped but that markets are still "far from normal."
Still, in the markets the Ted spread slipped fleetingly to about 78 basis points. That was the narrowest since the credit market crisis first erupted in August last year and showed risk aversion in short-term lending markets was ebbing.
The narrowing of the Ted spread "now is seen as an easing of the credit crisis and a gradual return to normalcy, helped by 325 basis points in rate cuts by the Federal Reserve and the pumping of almost $1 trillion into the financial system," wrote Marc Chandler, chief global currency strategist with Brown Brothers Harriman in a research note.
When investment bank Bear Stearns had to be rescued in March, the Ted spread ballooned to over 200 basis points, Chandler noted.