US Treasuries ended little changed on Friday, but posted their best month in over five years as investors saw tighter credit markets as inevitably pushing the Federal Reserve toward an interest rate cut.
Bonds traded lower through much of the day on Friday as investors turned from the perceived safe-haven of government debt to buy riskier stocks after Federal Reserve Chairman Ben Bernanke bolstered hopes of an interest rate cut. But bonds recovered some ground late on Friday as stocks retreated from the days's highs.
Bernanke said late on Thursday a resurgence in financial market strains in recent weeks had dimmed the outlook for the US economy, signalling an openness to ease monetary policy again to keep growth alive.
Normally, expectations of lower interest rates would push bond prices higher and yields lower. On Friday however the rally in stocks through much of the day set the tone, as investors considered the possibility that lower official interest rates might throw a bit of a lifeline to financial companies struggling in a global credit crisis, and shore up the economy.
"The bond market move is all about stocks, and what the Fed is going to do or not do," said Mary Ann Hurley, vice-president of fixed-income trading at D.A. Davidson & Co in Seattle. Benchmark 10-year notes traded 4/32 lower in price for a yield of 3.95 percent from 3.93 percent late on Thursday. Bond yields move inversely to prices.
November has proven a banner month for bond prices as investors have snatched up lower risk investments. Yield on the 10-year note posted its biggest one-month fall since September 2002, and price gains this week pushed yields to their lowest in over three years.
"A big portion of the rally we've seen over the past two to three months is simply on equity weakness and the flight-to-quality bid," said Carley Garner, senior analyst at Alaron Trading in Las Vegas. "The market is going to have to peel some of that bid out of Treasuries as the stock market recovers," Garner said of Friday's weakness in longer-dated bonds.
Bond traders were buzzing on Friday about talk the US Treasury Department was finalising a plan with mortgage industry leaders that would hold interest payments steady for many subprime borrowers facing higher rates and possible foreclosure.
But traders said they were unclear as to how the plan might work given that most subprime debt had been securitized and bundled in with other forms of debt. A relatively benign reading in the Fed's favoured inflation measure on Friday did nothing to hurt renewed rate-cut hopes.
The government said the core personal consumption expenditure index, which does not include food and energy prices, rose 1.9 percent in October on a year-over-year basis, which is within the Fed perceived comfort zone for inflation of one to two percent.
Data on Friday also showed business activity in the US Midwest expanded at a faster-than-expected pace in November, but that US construction spending fell by more than expected in October. Two-year notes traded flat in price for a yield of 3.02 percent, while 30-year bonds traded 29/32 lower in price for a yield of 4.39 percent from 4.34 percent.
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