Treasurys fall more; yields hit 4-month highs

NEW YORK (MarketWatch) � Treasury prices extended losses Wednesday, pushing yields to their highest levels since October and breaking a range after the Federal Reserve sounded slightly more comfortable with the economic outlook and most U.S. banks passed their stress tests.

Bonds extended losses after the government�s sale of 30-year bonds, which came at the highest yield since August.

Yields on 10-year notes 10_YEAR , which move inversely to prices, rose 14 basis points to 2.28%. A basis point is one-hundredth of a percentage point.

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The benchmark securities haven�t seen yields close above that level since October.

Yields on 30-year bonds 30_YEAR �increased 15 basis points to 3.42%, touching their highest level in four months.

It�s also the biggest one-day increase in benchmark yields since October.

Yields on 5-year notes 5_YEAR �jumped 12 basis points to 1.11%. They haven�t closed above 1% since October.

Two-year note yields 2_YEAR �rose 4 basis points to 0.39%, their highest since July.

October is when the Fed began a program known as Operation Twist, under which it�s still buying long-term debt and selling shorter-dated holdings to hold down interest rates without the central bank further expanding its balance sheet.

After meeting Tuesday, the Federal Open Market Committee noted improvement in business and household spending and acknowledged the recent rise in gasoline prices, but the policy panel also said the inflationary effects are expected to be temporary. See story on Fed meeting.

�The Fed acknowledged a lot of improvement in the economy, which was a little new,� said Jason Brady, who helps oversee about $4 billion in fixed-income assets at Thornburg Investment Management. �People have been continually considering the chance of aggressive moves from the Fed and the statement said �eh, not so much.� That made people reconsider the desirability of Treasurys,� especially with 10-year yields below the rate of inflation.

Also, traders and investors had taken a lot of short positions, bets that Treasury prices would fall, noted David Ader, head of government-bond strategy at CRT Capital Group.That positioning may limit the move higher in yields.

�One, or several, days of price action shouldn�t be interpreted as the beginning of the end or end of the beginning,� Ader wrote in a note. �Figure we all were poised to want to sell, positions have been leaning short by most measures, and who isn�t happy about the selloff?�

In the statement after the Fed�s policy meeting, central-bank officials also left no hint of extending its bond-purchase programs or of needing a new one. Such efforts are often referred to as quantitative easing.

/quotes/zigman/4868283/delayed 10_YEAR 1.50, +0.02, +1.35% Ten-year yields at highest since October Yields back to levels last seen when the Fed started "Operation Twist."

�The Fed�s statement acknowledged the improving labor picture and the temporary run-up in inflation, both of which dampened QE expectations,� said George Goncalves, head of U.S. rates strategy at Nomura Securities. �This is one of the key drivers causing the rates backup right after FOMC.�

J.P. Morgan Chase & Co. JPM , Bank of New York Mellon Corp. BK �and other banks said they would lift their dividends and buy back more shares after they passed the Fed�s stress tests. The tests were designed to see if banks have maintained sufficient capital ratios to withstand a hypothetical deep-recession scenario. Read about bank stress tests.

Goncalves added: �J.P. Morgan�s share-buyback plan and dividend increase further fueled the rates selloff, this time accompanied by a spike in equities as well� on Tuesday. U.S. stocks added to gains modestly on Wednesday.

Treasury prices remained under pressure after a report on U.S. import prices and after the Treasury Department sold $13 billion in 30-year bonds at a yield of 3.383%. Read about import prices. See recent Treasury auction results.

The auction drew weak demand from investors, including a group which is seen as a proxy for foreign bidders. See more on 30-year bond auction.

The U.S. sold 10-year and 3-year notes 3_YEAR �earlier this week.