Treasurys Fall Pushing Yields to 2-Month Highs

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U.S. government debt prices fell on Monday in choppy trading with benchmark yields hovering near two-month highs, as traders waited for further clues on whether U.S. growth will be strong enough for the Federal Reserve to taper its bond purchases.

Speculation about whether the Fed will begin slowing its bond purchases later this year has sent yields surging this month as analysts become more comfortable with the view that the economy is on a firmer footing and job growth is on a sustainable path.

Traders and analysts anticipated Treasurys will likely move in a tight range over the next few days, as investors await clues on where the U.S. central bank stands on quantitative easing from Fed Chairman Ben Bernanke, who will testify about the economy before a congressional panel on Wednesday.

"The market is going to have a hard time moving away from its current level ahead of the Bernanke testimony," said Stan Shipley, a bond strategist with ISI Group in New York.

Treasurys prices rose earlier in a rebound from Friday's losses, before sliding again in the afternoon.

Benchmark 10-year Treasurys notes were last down 3/32 in price to yield 1.96 percent, up from 1.95 percent from late Friday.

The yields are holding just under their two-month highs of 1.985 percent reached on Wednesday. They have surged from 1.64 percent at the beginning of May.

A weaker dollar helped cap the decline in U.S. bond prices as it makes it cheaper for foreign investors to buy Treasurys and other assets.

The greenback retreated against the yen and other major currencies after Japan's economy minister Akira Amari remarked its currency might have weakened enough in the wake of a bold $1.4 trillion monetary plan announced in April. The yen fell to a 4-1/2-year low against the dollar last week.

Fed's Tapering

While the Fed's aggressive purchases of Treasurys and mortgage-backed securities, known as QE3 and currently at $85 billion a month, have helped the housing market recover and consumers and companies pay down their debt, they have fallen short of achieving the Fed's goals of substantially lowering unemployment and sustaining real economic growth, analysts said.

Since late last year, there have been discussions among Fed policymakers over the cost of sticking to this ultra-easy monetary scheme, which critics say is inflationary.

(Read More: US Job Market Gains Could Lead Fed to Taper QE3 Early)

Dallas Fed President Richard Fisher told CNBC television on Monday that while the Fed's policies have boosted stocks and helped the rich, it was unclear whether they are doing enough for the broader U.S. economy. Fisher has been an opponent of the Fed's asset purchase program.

"There is some impending fear that the Fed will taper its bond purchases," said Robbert Van Batenburg, director of market strategy at Newedge USA LLC in New York.

(Read More: QE Halt Would Be 'Too Violent' for Market: Fed's Fisher)

By contrast, Chicago Fed President Charles Evans said on Monday that the U.S. central bank has the appropriate amount of monetary accommodation in place.

Many analysts on Wall Street see the Fed as unlikely to back away from its commitment to bond purchases this year with unemployment still high and recent data suggesting a higher risk of deflation.

"Until we see sustainable growth in payrolls, the Fed is not going to change its policy anytime soon," said Mike Cullinane, head of Treasurys trading in D.A. Davidson in St. Petersburg, Florida.

Bets on another spring economic slowdown fell after a better-than-expected April jobs report over two weeks ago, but they made a partial comeback after a spate of disappointing reports on housing and manufacturing activities last week.

The U.S. central bank bought $1.45 billion in Treasurys that come due in February 2036 to February 2043 for its QE3 program on Monday.

It will purchase between $2.75 billion and $3.50 billion in notes due 2020-23 on Tuesday.

US Treasury Yields

US 10-YR
US 30-YR