Prices continued dropping for short-term bonds when the market opened Friday, maintaining a selloff over interest rate fears that began Tuesday.
Yields for maturities from three to six years softened up to five basis points, adding to Thursday's jump of 11 basis points. Bonds maturing in seven years saw another three-basis point cut in price.
"It seems like the short end is vulnerable, maybe on the seven more than anything," said a financial advisor in Chicago.
Yields on intermediate bonds increased as much as five basis points for those maturing in eight or nine years. The long-end opened steady on Friday.
Treasuries began selling off after Federal Reserve Board Chair Janet Yellen said during a question and answer session at a press conference on Wednesday afternoon that the Fed was could ending its bond purchasing program, known as quantitative easing, in October 2014, and would likely raise interest rates six months after that, in April 2015.
Investors had previously predicted that the Fed would keep interest rates low until mid-to late-2015. Treasuries weakened during Yellen's speech, and munis followed.
"You haven't seen threes, fives, and sevens move like that in a year," the advisor said.
The sell-off perplexed some market participants who traditionally invest in short-term bonds in the face of a possible interest rate hike. Traders and analysts said the selloff could be an effect of low issuance this year, which has kept the shorter end of the curve rich.
"In our view, the short part of the market is overvalued, especially the 3- to 5-year part of the curve," Barclays said in a report released on Friday.
"We recognize the concerns about duration risk, but think that that the potential for a continued flattening of the Treasury yield curve and muni ratio expansion, as well as lower carry, are risks to the relative performance of shorter-duration munis," the report continued.
Municipal bond mutual fund flows reported by Lipper showed a $107 million influx in the week ended March 20, compared with $223 million the previous week.
Next week's total potential volume is projected to be $4.66 billion, up from this week's light issuance of $3.18 billion, according to Ipreo and The Bond Buyer. Historically the amount of new paper has been much lighter this month, reported Barclays, though the market is on the path of producing positive net supply.
California's prison system will issue $793 million bonds as the highlight of next week's issuance. The bonds are rated slightly below the state's general obligation bonds, at A2 by Moody's Investors Service and A-minus by both Standard and Poor's and Fitch Ratings.
Treasuries were mixed Friday morning, as the 30-year yield fell as much as three basis points to 3.64% and the 10-year benchmark slid one basis point to 2.77%. Two-year notes inched up one basis point to 0.45%.
