The U.S. yields pared the advance as riskier assets slid and the high rate levels drew investors. Yields surged the most since 2011 yesterday, when Bernanke said the Fed may slow its $85 billion in monthly buying under quantitative easing later this year if growth is in line with its forecasts. A Bloomberg survey said it will cut purchases by $20 billion in September. A sale of U.S. inflation-linked debt drew below-average demand.
"Bernanke made it clear that tapering QE was on the table," said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. "The fact that a QE story has taken out a lot of the bid for stocks has on the margin kept the Treasury sell-off from exacerbating, but in the wake of the Bernanke press conference, the bearish sentiment in the Treasury market appears likely to be with us for a while."
The 10-year Treasury yield increased seven basis points, or 0.07 percentage point, to 2.43 percent at 2:52 p.m. New York time and reached 2.47 percent, the highest since Aug. 8, 2011, according to Bloomberg Bond Trader prices. It jumped 17 basis points yesterday, the most since October 2011. The price of the 1.75 percent security due in May 2023 dropped 5/8, or $6.25 per $1,000 face amount, to 94 3/32.
The 30-year bond yield rose above 3.5 percent for the first time since September 2011, reaching 3.55 percent. Seven-year note yields climbed as much as 11 basis points to 1.89 percent, the highest level since August 2011, before trading at 1.85 percent, up seven basis points.
Yields on 30-year Treasury Inflation Protected Securities climbed to 1.38 percent in daily trading before an auction of the bonds, the highest level since August 2011.
A U.S. sale of $7 billion in 30-year TIPS drew a yield of 1.42 percent, the highest in two years. The bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount of securities sold, was 2.47, versus an average of 2.69 percent at the previous nine offerings since 2010.
"The TIPS auction was pretty awful given the concession that we had," said Aaron Kohli, an interest-rate strategist at BNP Paribas SA in New York, one of 21 primary dealers that are obligated to bid at U.S. debt auctions. "There just isn't any inflation pressure, and the markets aren't buying that there will be any inflation."
The yield gap between 30-year Treasuries and TIPS, a gauge of traders' expectations for consumer prices over the life of the debt that's called the 30-year break-even rate, shrank below 2.1 percentage points for the first time since May 31, 2012. The 10-year break-even rate touched 1.98 percentage points, the least since January 2012.
The Treasury Department said it will sell $99 billion of notes next week: $35 billion in two-year securities on June 25, an equal amount of five-year debt the next day and $29 billion in seven-years on June 27.
Stocks slid, with the Standard & Poor's 500 (SPX) Index dropping 2.3 percent and the MSCI World Index tumbling 3.2 percent.
Bill Gross, manager of the world's biggest bond fund at Pacific Investment Management Co., said 10-year yields may not be able to maintain their increase.
A yield of "2.40 percent on the 10-year is a significant barrier of support," Newport Beach, California-based Gross said during a radio interview on "Bloomberg Surveillance" with Tom Keene and Michael McKee. "I don't think it will last long here." Support is a chart level where orders may be clustered.
German bund yields rose 12 basis points to touch a four-month high of 1.68 percent, while U.K. five-year gilt yields jumped as demand fell at a sale of the securities. The gilt yields climbed as much as 24 basis points to 1.48 percent, the highest level since Oct. 28, 2011. New Zealand's 10-year rate surged 30 basis points to 4.09 percent, the biggest jump since October 2008.
The Fed will cut its monthly bond purchases to $65 billion at its Sept. 17-18 policy meeting, according to 44 percent of economists in a Bloomberg survey after a press conference by Bernanke yesterday. In a June 4-5 survey, only 27 percent of economists forecast tapering would start in September.
The central bank has been buying $45 billion of Treasuries and $40 billion of mortgage securities each month to put downward pressure on borrowing costs in its third round of asset purchases. It has kept its target rate for overnight lending between banks at zero to 0.25 percent since December 2008 to support the economy.
After a meeting of the Federal Open Market Committee that ended yesterday, the Fed left unchanged its statement that it plans to hold its target interest rate at almost zero as long as unemployment remains above 6.5 percent and the outlook for inflation doesn't exceed 2.5 percent. Officials lowered estimates for unemployment and inflation, while characterizing the recent drop in consumer prices as transitory.
Policy makers now expect a jobless rate of 7.2 percent to 7.3 percent this year, according to forecasts released yesterday, compared with 7.3 percent to 7.5 percent in their March estimates. They predict unemployment will fall to 6.5 percent to 6.8 percent in 2014.
"If the Fed is right in its assessment, then it's likely bond yields will continue to rise because the market will start to price in the fed funds going up, probably in 2015," said Steven Major, global head of fixed-income research at HSBC Holdings Plc in London, referring to the central bank's main interest rate.
The probability the central bank will increase its benchmark rate target by at least a quarter-percentage point by October 2014 was 42 percent, Fed funds futures showed. The likelihood was 33 percent on June 18.