US Treasuries fell on Friday, as investors favoured stocks and risky assets over bonds in the wake of better-than-expected earnings. The highly anticipated results of stress tests on some of Europe's biggest banks showed that only seven banks failed the tests. Although analysts and traders cited concerns that the tests' standards were not tough enough, the results failed to send investors to seek safe havens.
"The results were good enough for risk markets and they took some fear bids away from the bond market," said Larry Milstein, head of government and agency trading at R.W. Pressprich & Co in New York. The regulatory test covered 91 banks, which have two-thirds of all assets in the euro zone banking system.
Bond investors also began making room for next week's $104 billion worth of coupon-bearing supply, exerting pressure on Treasuries. Treasury yields, which ended modestly higher on the week, are still near their historic lows on expectations that the Federal Reserve would not tighten monetary policy until the fourth quarter of 2011, investors said.
Fed Chairman Ben Bernanke's "unusually uncertain" economic outlook delivered before Congress this week "spooked the market a bit," said Cliff Corso, chief investment officer at Cutwater Asset Management in Armonk, New York. The yield on two-year notes, which moves inversely to the price, rose 2 basis points at 0.58 percent after posting an all-time low of 0.5560 percent on Wednesday.
The yield on benchmark 10-year notes was up 6 basis points from late Thursday at 2.99 percent after nearing a 15-month low two days ago. The spread between the two-year and 10-year yields closed the week at 241 basis points late on Friday. This gauge on investors' outlook on US economic growth shrank as little as 230 percent earlier this week, a level not seen in almost 10 months.
An official estimate on the US gross domestic product for the second quarter will be released next Friday. Analysts polled so far by Reuters predict that second-quarter GDP grew at an annualised rate of 2.5 percent, slower than the 2.7 percent pace in the first quarter and the 5.6 percent rate in the fourth quarter of 2009.
While the recovery is slowing, most analysts said the jury is out whether the US economy will contract again after growth resumed a year ago. The recent spate of upbeat earnings results have mitigated the recent wave of disappointing data on housing, jobs and manufacturing activity.
Some encouraging news overseas on Friday also soothed some worries of a global slowdown. Britain's GDP grew by the largest amount in four years, while a measure of business sentiment in Germany hit a three-year high.
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