US Treasury prices slipped on Friday as the market absorbed new supply from the Treasury's $51 billion quarterly refinancing and looked ahead to congressional testimony from Fed Chairman Alan Greenspan. "It's the aftermath of the auctions combined with a long end that was overbought and ripe for some profit-taking," said John Canavan, market analyst at Stone and McCarthy Research Associates.
The Treasury sold three- five- and 10-year notes this week in three auctions that comprised its quarterly refunding.
Relationships among short-, medium and longer-dated securities shifted during the day, with the curve steepening at first, but ending mostly flatter.
"The market has been whipped one way and then the other as far as curve trades are concerned in the past few days, but what we're talking about here is short-term fluctuations," Canavan said. "In the longer term, the trend toward a flatter curve has not been broken."
The difference between short- and long-term yields has been narrowing, thereby flattening the curve, because traders have bet time and again that the value of longer-term debt would be protected by the Federal Reserve's policy of forestalling inflation pressures by raising short-term interest rates.
As a result, investors have favoured longer-term debt over short-term securities, causing longer-term yields to fall while short-term yields have risen.
The benchmark 10-year Treasury note was down 8/32 in price to yield 4.09 percent, while the two-year note was down 2/32 in price to yield 3.33 percent, putting the difference between two- and 10-year note yields at 76 basis points.
Drew Matus, senior financial economist at Lehman Brothers, said market players were also waiting for Fed Chairman Alan Greenspan's congressional testimony on Wednesday.
"We may have a little moving around before then, but I can't imagine anything significant happening before Greenspan talks," Matus added.
Greenspan is due to testify on the US central bank's semi-annual report on monetary policy before the Senate Banking Committee on Wednesday and the House Committee on Financial Services on Thursday.
"Trading on Friday has been a classic redistribution of the 10-year supply the market got this week and really all the supply from the refunding," said James Caron, fixed-income strategist at Merrill Lynch Government Securities.
Given that the curve had flattened so much, the long end of the maturity range was the most vulnerable to selling, Caron said. So there was a slight steepening of the yield curve after weeks of profitable flattening trades.
Investor speculation that Greenspan may be more dovish next week in comments to Congress also may have encouraged traders to unwind recent curve flattening positions.
"If there is any sniff that maybe (the Fed) is coming close to the end of their tightening, then maybe these flattening trades are not going to pay off as much as they have already, and that is why people are being a little more cautious about the flattening trades," said Kevin Logan, economist at Dresdner Kleinwort Wasserstein in New York.
This caution was evidenced this week in the government's $51 billion quarterly refunding, which had good indirect bidder interest in the two-year and three-year notes, but relatively limp indirect bidder interest in an auction of 10-year notes.
The 30-year bond, whose yield has plunged 50 basis points since the start of the year, was down 4/32 with a yield of 4.48 percent, while the 5-year note was yielding 3.70 percent.
Remarks by Fed Governor Ben Bernanke about the US trade deficit did not stir the market. He also told reporters that inflation was likely to remain under control.
Fed Bank of San Francisco President Janet Yellen will participate in an economic outlook discussion at 4:50 pm.
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