Treasuries tumble on Fed comments
Bernanke's remarks raise fears of a sooner-than-expected hike in interest rates and spark a selloff in the bond market.
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NEW YORK (Reuters) -- U.S. Treasury debt prices sank Friday after the Federal Reserve said it would not let the current era of easy money get out of hand, raising fears it was closer to hiking interest rates than previously thought.
The comments on Thursday night by Fed Chairman Ben Bernanke caused the biggest bond market selloff in more than a month.
The Fed's zero interest rate policy has helped drive the dollar to 14-month lows, and a lackluster long-bond auction on Thursday reminded officials that with a weak currency, foreign appetite for U.S. assets has limits.
Bernanke said the U.S. central bank must continue to prop up the economy for an extended period but can't do so indefinitely for fear of triggering an inflationary surge.
His words reverberated through debt markets, sending benchmark yields to two-week highs.
"He is still talking about an extended period of low rates but any time they use the tightening word it just brings to mind the fact maybe we're getting closer to the start of that whole cycle," Rick Klingman, managing director of Treasury trading at BNP Paribas in New York, said about Bernanke.
Two-year notes fell 5/32 on the day, yielding 0.99% versus 0.9% at Thursday's close.
Benchmark 10-year notes fell 1-2/32 on the day, yielding 3.38 percent, the highest since Sept. 25, versus Thursday's close of 3.26 percent. They were having their worst day in over a month.
The 30-year long bond fell 2-11/32 on the day. They were yielding 4.23 percent, pushing last week's five-month low of 3.89 percent further into the distance. The bond was on track for its biggest single-day jump in yields in nearly three months.
Traders were also taking advantage of their last opportunity to sell ahead of a three-day weekend, with the bond market closed on Monday for Columbus Day.
Bernanke's comments were the latest in a series of statements that appear aimed at warning markets not to expect easy monetary conditions to last forever to ward off inflation.
The U.S. central bank is not expected to raise interest rates until after the jobless rate in the United States has peaked at the end of this year, or early in 2010, according to the majority of primary dealers polled by Reuters.
Officials, however, appear to be walking a tightrope, as they have also reiterated that economic stabilization is their first priority.
Indeed, some analysts say monetary tightening remains a long way off, given lingering effects of the worst recession in 70 years and Bernanke's reputation as an expert on the severe economic downturn of the 1930s.
"The market appears to be overreacting to Bernanke's comments last night about being ready to hike rates when the economy rebounds," analysts at RBC Capital Markets said in a note.
"While we certainly believe that Bernanke, especially given his academic background studying the Great Depression, will be ready to quickly respond when the time is right, it is premature to believe that time may be imminent." 
