US Treasuries prices rose on Friday as disappointing earnings from technology giants Google and Microsoft weighed on stocks and rekindled safe-haven bids for bonds, pushing benchmark yields to two-week lows. Google and Microsoft both announced disappointing quarterly results, building some concerns over how far the ongoing equity rally will extend.
The Federal Reserve's resumption of its bond purchase program, known as Quantitative Easing 3, or QE3, on Friday after a two-day hiatus, also helped lift bond prices to rise for a second week in a row - something that has not happened since April. Investor sentiment on US bonds has stabilised, analysts say, after its rapid deterioration on fears the US central bank will raise short-term interest rates not long after it halts QE3, perhaps next year. Those worries, together with data on stronger-than-expected jobs growth this spring, propelled benchmark yields to 2.755 percent last week, the highest level in 23 months, according to Reuters data.
Fed Chairman Ben Bernanke stressed in testimony to Congress on Wednesday and Thursday that the central bank will likely stick to a near-zero rate policy for a long time even after it stops its Treasuries and mortgage-backed securities purchases, which currently total $85 billion a month. "Things are stabilising and we have some clarity now," said Kathy Jones, fixed-income strategist at Charles Schwab in New York, which has over $2 trillion in client assets.
Wall Street expects the Fed will likely scale back QE3 at its September policy meeting, which follows its July 30-31 meeting, if the economy shows further improvement. With Bernanke's testimony behind them, investors shifted their focus to company earnings and economic data to gauge whether the US economy is strong enough for the Fed to reduce its bond-purchase stimulus. "The bottom line is that Fed policy is and has always been data dependent," said James Sarni, managing principal at Payden & Rygel in Los Angeles which oversees $80 billion in assets.
On light trading volume, benchmark 10-year Treasury notes rose 12/32 in price to yield 2.488 percent, which was down 4.4 basis points from late on Thursday and on track to fall 10 basis points on the week. The 10-year yield traded as low as 2.461 percent two days earlier. The 30-year bond gained more than 1 point, with a yield of 3.572 percent, down 6.4 basis points from Thursday's close and on track to decrease 6 basis points from a week ago.
On Wall Street, the tech-heavy Nasdaq composite was 0.7 percent lower in late trading, while the Standard & Poor's was up 0.1 percent, paring earlier losses. The Dow Jones industrial average was off 0.1 percent in late trading. Bond activity dwindled earlier than usual as some traders took off for the weekend due to the lack of economic data and this week's heat wave that hit much of the Eastern United States.
Safe-haven US government bonds were also supported after the city of Detroit filed for bankruptcy on Thursday, the largest-ever municipal bankruptcy in US history. The news spurred selling in the $3.7 trillion municipal bond market on Friday. Treasuries prices also rose on the Fed returning to the market for the first time since Tuesday, buying $3.14 billion in notes due from 2020 to 2023. "There has been constructive news for bonds over the last 20 hours or so; we had a pretty successful TIPS auction, some weakness out of Google and Microsoft, and the bankruptcy announcement out of Detroit," said Kevin Walter, head of Treasuries trading at BNP Paribas in New York.
The US Treasury Department sold $15 billion in 10-year Treasuries Inflation-Protected Securities (TIPS) on Thursday to solid demand. Next week it will auction $99 billion in new coupon-bearing supply that include $35 billion in two-year notes on Tuesday, $35 billion in five-year notes on Wednesday and $29 billion in seven-year debt on Thursday.
Analysts cited encouraging signs of revived demand for US bonds. Japanese investors bought foreign bonds for a second straight week, according to capital flows data released by Japan's Ministry of Finance on Friday. Outflows from US bond mutual funds and exchange-traded funds have reached $9.4 billion in July, compared with a record total of $67.9 billion in June during the bond market rout, TrimTabs Investment Research said on Friday.
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