US Treasuries were little changed on Tuesday and could stall near current levels as traders may have priced in too much optimism for near-term economic growth. Treasuries failed to find strong direction for most of the day as traders looked ahead to key job data scheduled to be released on Friday.
A heavy supply of corporate bonds expected this month, meanwhile, may sap demand for government debt as investors seek higher returns. A recent run-up in yields suggests investors expect December's employment data to show the economy growing at a brisk rate, though at current levels even a strong number may disappoint. "I don't think there's any question the markets are set up for almost a best case scenario over the next two weeks," said Christopher Low, chief economist at FTN Financial in New York.
US employers are expected to have added 140,000 people to their payrolls in December, according to a Reuters poll of economists. Whisper numbers on the street are that hires may have risen to around 200,000, said Low. "If you get in the 100-150,000 range, which is actually a good showing relative to the rest of the year, that would be disappointing and we would likely see profit taking," Low said.
Benchmark 10-year note yields have increased to 3.33 percent late on Tuesday, from 2.93 percent in early December, on low liquidity and bets economic growth will increase at a faster pace. Bond futures are pricing in expectations the Fed will raise interest rates in the first quarter of 2012, which most economists view as too aggressive.
Treasury yields may be likely to consolidate near current levels in the near-term, and yields may slip lower, however, as investors wait on further supportive data that the economy is advancing as much as the market expects. "These markets are consolidating recent movements," said Tony Crescenzi, a portfolio manager at PIMCO, the world's largest bond fund, in Newport Beach, California.
"Its become too obvious a trade that risk assets would outperform but they have become at least in the short term crowded trades, which therefore have difficulty being sustained in the short run," he said. Stocks were little changed on Tuesday, after seeing a strong run up through December, while gold futures fell more than 3 percent. Ten-year Treasury yields are likely to continue near their current range in the near-term, and but may rise above 3.5 percent when there are more signs of economic improvement, said Crescenzi.
Companies are expected to sell around $75 billion to $80 billion in dollar-denominated corporate debt this month which is likely to attract investors seeking out more favourable returns than Treasuries.
A heavy month of corporate bond issuance could spark a bid for Treasuries from hedgers, as traders that sold Treasuries ahead of deals coming to market buy back the Treasuries when the corporate bonds price. Interest rate swap spreads also tightened on Tuesday as traders hedged the debt sales. Ten-year swap spreads tightened 0.75 of a basis points to around 6.25 basis points, and has rallied from as high as 8.75 percent on Monday and over 17 basis points in early December.
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