US Treasury prices rallied on Friday in technical buying and talk of possible foreign central bank buying that overshadowed a rising stock market and stronger US retail sales and consumer sentiment. The benchmark 10-year Treasury note rose 16/32 for a yield of 4.18 percent, down from 4.24 percent late Wednesday. The next downside objective is 4.16 percent.
With buying concentrated in longer maturities the yield curve flattened sharply, pulling the spread between the two-year and 10-year yields to 135 basis points, the lowest since September 2001.
Some dealers now target a spread of 130 bps.
A sharp rise in the yen the past two days raised the potential for intervention by the Bank of Japan buying dollars and spending the proceeds on Treasuries, said Tony Crescenzi, chief bond market strategist at Miller Tabak & Co There was also talk that the central bank of an EU member bought dollars on Wednesday and Treasuries on Friday following the US Veterans Day holiday on Thursday.
End-of-week squaring of short Treasury/long Bund positions established during the dollar's recent slide also supported the bond market, dealers said.
Crescenzi said the failure of heavy selling to appear after the morning's solid economic data also gave bulls a buy signal.
"Whatever the reasons for today's rally, they are not compelling enough to result in a continuation of the rally," he said.
Robust retail sales suggested the economy is growing strongly in the fourth quarter, giving the Federal Reserve leeway to continue raising borrowing costs.
October US retail sales rose 0.2 percent as expected. Excluding autos, sales jumped 0.9 percent compared with forecasts of a 0.5 percent gain, and followed on from a robust 0.8 percent increase in September.
Later, the University of Michigan's first consumer sentiment survey for November was 95.5, higher than expected and the highest in three months.
"With sentiment picking up and October retail sales also positive, the sales outlook looks quite favourable heading into the Christmas season," said Doug Porter, senior economist at BMO Nesbitt Burns in Toronto.
Short-term rate futures were unmoved by the day's events. Fed fund futures show an 80 percent chance the Federal Open Market Committee will raise rates again in December, similar to levels traded over the past week.
Minutes from the September 21 FOMC meeting released on Friday said the policy actions needed to be increasingly tied to incoming data.
In that vein, many dealers conclude that only an extremely weak November payrolls report will prevent the Fed from raising target rates by 25 basis points in December.
The next first major element for Treasury prices next week is likely to be Wednesday's consumer price index report.
The core CPI is forecast to rise by 0.1 percent in October.
The 30-year bond rose 1-3/32 point in price, yielding 4.89 percent, down from 4.96 percent. Five-year notes rose 8/32 to yield 3.51 percent, down from 3.56 percent. Two-year notes were up 2/32 at a yield of 2.83 percent.
Late Friday, the Fed reported that foreign central banks added $3.685 billion to their huge holdings of US Treasuries and agency debt in the week ended Wednesday, taking the total to $1.308 trillion.
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