NEW YORK (CNN/Money) - Treasury prices fell Friday after a spike in the dollar stoked fears that foreign central banks' appetite for U.S. government debt could ebb.
At around 3:30 p.m. ET, the benchmark 10-year note fell 27/32 to 101-14/32 to yield 4.07 percent, from 3.95 percent late Thursday, and the 30-year bond lost 1-15/32 in price to 106-15/32 yielding 4.94 percent, up from 4.84 percent late Thursday.
The two-year note shed 3/32 to 100-12/32 to yield 1.67 percent, and the five-year note dropped 1/2 of a point to 100-28/32, with a yield of 3.06 percent.
In the currency market, the euro fell to around $1.2590 after reaching a session low of $1.2567, a loss of 1 percent from Thursday's New York close.
The dollar rose 0.5 percent to ¥106.52 on the day and recovered from a near three-year low of ¥105.76.
The euro lost strength after a diplomatic source told Reuters that euro zone ministers attending a Group of Seven meeting next month will say that further strength in the euro could cause the European Central Bank to cut interest rates.
The comments knocked the euro lower against the dollar, which in turn sparked concern among traders that Asian central banks could cut back on their purchases of dollars.
Since much of such intervention money, particularly from the Bank of Japan, has wound up in Treasurys in recent months, the currency flip-flop forced investors out of the bond market on expectations for reduced foreign demand.
A suggestion from the U.S. Treasury that it might start issuing 20-year TIPS, or inflation-indexed bonds, sparked talk that the government might reintroduce the 30-year bond, compounding a sell-off in the long end.
"Treasury has claimed it didn't want to issue anything beyond 10-years because that tied their hands," noted Drew Matus, senior financial economist at Lehman Brothers. "Now the market's thinking that if a 20-year is suddenly OK, then why not bring back the 30-year?"
Jostling for technical positions in the market was also partly responsible for the selling, which reversed an early climb and ate into the gains from a three-day rally.
Traders said speculators bought early in hope of breaking major chart resistance at 3.90/3.91 percent in the 10-year yield and forcing distressed hedging from mortgage managers.
But the ploy failed at 3.92 percent, and all the gains unraveled when European investors decided to book profits at the end of their trading day.
"The market tried so hard to break 3.90 (percent), but the Europeans threw in a curve ball," said Sadakichi Robbins, head of global fixed-income trading at Bank Julius Baer.
The selling was hardly surprising, given that Asian central banks have been big buyers of dollars in recent months and have parked much of that money in Treasurys, helping absorb a flood of government borrowing.
On Thursday, the Federal Reserve said its total holdings of Treasury and agency debt for central banks abroad rose $13.86 billion to a staggering $1.108 trillion in the week ended Jan. 21.
-- from staff and wire reports
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