US Bond Prices Fall on Jitters Over Fed Bond Buying

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U.S. longer-dated government debt prices fell on Monday a day before the Federal Reserve meets for a two-day policy meeting on concerns the central bank might be moving closer to announcing it will trim bond purchases, though trade was volatile and volume was light.

Markets have been on edge since Fed Chairman Ben Bernanke told a congressional hearing some three weeks ago that a decision on whether the central bank will pare its $85 billion monthly purchases of Treasurys and mortgage-backed securities could occur "in the next few meetings" if the economy showed further improvement.

Such a move on the Fed's stimulus program—its third round of quantitative easing, or QE3—was earlier than what some traders had thought and has whipped up fears interest rate increases would follow soon after the Fed stops buying bonds.

(Read More: Markets May Be Overpricing Risk of Fed Tapering)

The anxiety about a sooner-than-expected shift in the Fed's policy path roiled financial markets in recent weeks, which had been buoyed by bets the central bank would stay pat with its ultra-loose policy stand at least through early 2015.

Wall Street stocks fell from their record peaks, while the benchmark 10-year Treasury yield rose 46 basis points in May, its biggest one-month jump in nearly 2-1/2 years, according to Reuters data.

An article in the Financial Times on Monday advancing the view that the Fed would taper purchases this year accelerated selling of Treasurys as traders grew increasingly jumpy ahead of the Fed's meeting.

"The game is changing now with a very quick unwind in the bond market and a levered stock market," said Howard Simons, a strategist with Bianco Research in Chicago.

The Fed earlier on Monday bought $5.51 billion in notes due 2018 and 2019 as part of its ongoing QE3 purchases. A Reuters poll of economists show most believe the Fed will reduce its purchase program by the end of this year, and a significant number see less Fed buying as early as September.

That view is not universal, however. With employment growth still modest and inflation muted, many investors believe markets have over-reacted to Bernanke's comments in May.

A Wall Street Journal report last week that said the Fed was unlikely to end all its purchases at once prompted a sharp Treasurys rally.

"The market has gotten a little overdone in the sell-off," said Jeff Given, portfolio manager at Manulife Asset Management in Boston.

The Federal Open Market Committee, the central bank's policy setting group, will release a statement at 2 p.m. on Wednesday, followed by a press conference with Bernanke a half hour later.

"You're going to continue to see extreme volatility around these Fed meetings just because of what the chairman has stated," said Dan Mulholland, managing director in Treasurys trading at BNY Mellon in New York.

Intraday swings in the Treasurys market before the FOMC meeting were exacerbated by falling level of trades. As of 2 p.m., nearly $190 billion worth of Treasurys changed hands, 48 percent of its 20-day moving average, according to ICAP, the world's biggest broker-dealer for U.S. government debt.

Benchmark 10-year Treasurys were 11/32 lower in price to yield 2.171 percent, up 4.4 basis points from late on Friday, while 30-year bonds fell 23/32 in price to yield 3.348 percent, up 4.5 basis points from Friday's close.

Economic data showing unexpected growth in New York state manufacturing in June while home builder sentiment improved to a seven-year high also helped push Treasury yields higher.

—By Reuters

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