US Treasury debt prices slipped on Friday as a lack of economic data gave investors room to book profits after a three-day rally. This week's gains had pushed yields to their lowest levels in nearly a month, and Friday's dip generated only a modest retracement.
Benchmark 10-year notes were off 9/32 for a yield of 4.50 percent, up from 4.46 percent on Thursday and still near the bottom of a recent range. Dealers looked for bulls to test 4.42 percent again next week, although data releases would again be thin with the week shortened by the Thanksgiving holiday.
But at current levels, traders wondered how much further the market could climb given expectations for at least two more Federal Reserve interest rate hikes in December and January.
"Without the benefit of data or issuance, the impetus to extend those gains is limited," said David Ader, US government bond strategist at RBS Greenwich.
That was certainly the case on Friday, with five-year notes easing 4/32 for a yield of 4.42 percent, up from 4.40 percent Thursday. Two-year note yields inched up to 4.40 percent from 4.38 percent, while the 30-year bond lost 19/32 and was yielding 4.69 percent.
The spread between two- and 10-year notes widened to 10 basis points, after having hit a five-year low of basis points 7 earlier in the week. Looking ahead, bond investors fell broadly into two camps. Some argue that recent economic data, particularly those relating to consumer spending and housing, have shown hints that growth may slow next year.
They point to the fact that despite a recent drop in crude oil prices and gasoline costs, the coming Northern Hemisphere winter would likely take its toll on spending as consumers face sky-high home heating bills.
This bond-bullish group also notes that inflation figures released earlier in the week, while showing broad price increases, revealed nothing alarming enough to suggest the Fed needed to raise rates beyond current forecasts for another two, maybe three hikes.
But Treasury market bears argued that recent comments from policy-makers indicate they are bent on tightening monetary policy, barring a drastic downturn in the economy.
They note that the central bank has usually erred on the side of caution in its anti-inflation fight, and this time around is unlikely to be any different.
Indeed, St. Louis Fed President William Poole surprised some investors this week when he argued that the central bank's aim for core inflation should be in a range between 0.5 percent and 1.5 percent.
Consumer prices excluding food and energy grew 2.1 percent in the year to October, so by Poole's measure, the Fed already appears to be behind the curve.
One key support for Treasuries would likely come from continued foreign central bank demand.
Custody holdings numbers released by the Fed on Thursday showed overseas central banks bought $11.78 billion in Treasuries in the latest week, reflecting in part record demand for a Treasury refunding auction of $13 billion in 10-year notes.
Comments
Comments are closed.