US Treasuries debt prices fell on Friday as investors took a more optimistic tone on Greece's debt restructuring talks, reducing the demand for safe-haven bonds, and ahead of $99 billion in new supply planned for next week. Greece was closing in on an initial deal with private bondholders that would prevent it from tumbling into a chaotic default, but investors would end up with losses of up to 70 percent, sources close to the talks said on Friday.
"There's better sentiment out of Europe, anticipation of a debt deal out of Greece and a very small short base; those are things that are pushing the market a little lower," said Charles Comiskey, head of Treasuries trading at Bank of Nova Scotia in New York. The Treasury next week will sell $99 billion in new two-year, five-year and seven-year notes, which may have weighed on bonds as investors prepare for the new supply.
A report by The Wall Street Journal that Federal Reserve officials are awaiting further economic data before deciding whether to launch a new quantitative easing program was also seen weighing on bond sentiment ahead of next week's highly anticipated Fed meeting, its first policy meeting of 2012. The Fed is expected to push out expectations on when it will next raise interest rates until at least 2014, and the meeting will also be closely watched for any hints of new QE, which analysts expect would focus on mortgage-backed bonds.
Fears over Europe have been gradually receding since the European Central Bank offered cheap three-year loans to banks in the region, which are seen as having helped countries including Spain successfully refinance maturing debt. Investors, nonetheless, remain cautious over a renewal of negative headlines, which has been tempering a larger large selloff in US bonds.
Treasuries weakened even as stocks fell on Friday, and the negative correlation between the assets, wherein Treasuries normally gain on a weak stock market, and vice versa, may be breaking down, according to analysts at J.P. Morgan. "It appears we have entered into a new regime since mid 2011 and so far in 2012 where the connection between equity markets and Treasury yields has broken down once again," analysts including Eric Beinstein said in a report on Friday.
One reason may be that investors held significant cash into the year-end, and as such don't need to sell Treasuries to invest in stocks, J.P. Morgan said. There may also be a currency component as the ECB is expected to continue a very easy monetary policy, which may continue to weigh on the euro against the dollar, and keep a strong bid for dollar-based assets, the bank said.
Federal Reserve policy to hold rates low for an extended period and to consider new easing has also kept a cap on Treasury yields, which have largely failed to rise even as economic data points to a strengthening economy. New asset purchases "could keep Treasury yields lower than they might otherwise be in a bullish market environment," J.P. Morgan said.
Meanwhile, the Fed on Friday bought $2.52 billion in bonds due between 2036 and 2041 out of $5.51 billion offered as part of its Operation Twist program designed to lower long-term borrowing rates. The US central bank will buy as much as another $17.5 billion in long term debt next week as part of this operation.
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