US Treasury debt prices rose on Friday, extending the week's gains after a report on orders for big-ticket items heightened fears of slower growth that could end the Federal Reserve's program of rate increases sooner rather than later. A flight-to-safety bid developed this week as equities prices tumbled. The Dow Jones industrial average logged its second consecutive triple-digit loss, spooked by high oil prices that place a de facto tax on consumer spending.
"The past two day's performance by the stock market seems to suggest that the US economy could be much more vulnerable to the 'energy tax' and Fed tightening than many originally assumed," said Robert Keiser, agency and Eurodollar analyst at IFR Global Markets.
The 10-year Treasury note rose 9/32 in price for a yield of 3.92 percent, down from 3.95 percent on Thursday. Resistance is expected to a move below 3.90 percent.
The Commerce Department on Friday reported an unexpected 0.2 percent slip in May durable goods orders outside the transportation sector. The overall number was buoyed by a huge jump in civilian aircraft orders.
Wall Street had forecast a 0.5 percent increase in orders without transportation items. Dealers also noted that non-defence capital goods excluding aircraft, seen as a proxy for business spending, dropped a hefty 2.3 percent.
Dealers are now looking ahead to the June 29-30 Federal Open Market Committee meeting, and suspect that the policy outlook may be reaching an inflection point after rate hikes at eight consecutive meetings.
FOMC members speaking in recent weeks have left little doubt that another 25-basis point hike will be made, said Carl Tannenbaum, chief economist at LaSalle Bank.
Still, between restraint on economic activity likely to follow the Fed's recent tightening on a lagged basis, and global signs of softness, there may be reasons for the central bank to slow down, he said. Dealers will watch the Fed's post-meeting statement to see if the pledge for "measured" rate increases is retained, as well as for any tweak in language on inflation, pricing power and energy prices.
Interest rate futures cut the implied year-end fed funds rate to 3.67 percent, suggesting the four FOMC meetings scheduled for the second half of this year will result in either one or two rate increases.
Bonds continue to be buoyed by high oil prices and related fears that consumer spending - the biggest engine of the US economy - will be hurt by high gasoline prices.
Crude oil futures touched $60 per barrel for a second straight day before settling at $59.84, up 42 cents and a new record high close. The 30-year bond rose 19/32 to yield 4.22 percent, down from 4.25 percent on Thursday and near a congestion zone at 4.19 percent to 4.20 percent. Five-year Treasury notes were up 6/32 at a yield of 3.69 percent, down from 3.73 percent.
Two-year note yields were at 3.57 percent, down from 3.62 percent. The two-year/10-year yield spread was little changed at 34 basis points.
"The yield curve will likely continue to flatten until the Fed signals a pause is at hand," Keiser said.
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