US Treasury debt prices closed higher on Friday, buoyed by prospects for a string of interest rate hikes by the Federal Reserve in early 2006. Strength was associated with buying back of hedged positions in connection with offerings of some $7 billion in commercial mortgage-based securities, capped off by a $4.2 billion deal priced by J.P. Morgan and Nomura Securities.
Mortgage dealers typically hold short positions in Treasuries until the bonds are sold. A slide in crude oil futures toward $58 per barrel also supported bonds by easing worries about energy-related inflation.
Turnover was about 27 percent below its five-day average, according to interbank broker ICAP Plc. Next week's volume is likely to be even lower as the holiday season and end of year looms. The 10-year Treasury note added 6/32 in price for a yield of 4.44 percent, down from 4.47 percent on Thursday and from 4.53 percent a week ago.
Benchmark yields briefly fell to 4.43 percent, the lowest so far this month, but face challenges to a move below 4.40 percent and then 4.36 percent, technical analysts said. The market's current mind-set has been shaped by Tuesday's Federal Open Market Committee statement that suggested rates are finally approaching a neutral level that neither supports nor hinders economic growth.
"This week's FOMC meeting was a watershed in the sense that it was the first time the Fed left the window open for a pause in this 18-month-old tightening cycle," said David Rosenberg, North American economist at Merrill Lynch.
"Before, the Fed was willing to tighten through thick and thin - now it's more open-ended," he said. Rate futures show the market is confident of another rate hike in January. Prospects for March hang in the balance, with futures showing a 52 percent chance of an increase.
"The FOMC statement now provides more flexibility to Mr Greenspan and to his successor, Mr Bernanke, to set the course of monetary policy depending on how the economy will perform in the months ahead," said Adolfo Laurenti, associate economist at LaSalle Bank.
The US Commerce Department on Friday reported a third-quarter current account deficit - the combined balances on trade in goods and services, income, and unilateral transfers - of $195.8 billion, below the market consensus for a record high $205 billion gap.
The surprise was tied mostly to insurance payouts and donations from abroad in the aftermath of Hurricanes Katrina and Rita.
Still, the deficit fell to 6.2 percent of gross domestic product from 6.5 percent in the second quarter. So far the United States is not hurting for overseas buyers to absorb its prodigious debt.
"The big question is if this appetite for US assets will diminish," said Asha Bangalore, economist at Northern Trust. "It is a legitimate threat but how and when it will unfold is not clear."
Trading is likely to be quiet next week despite a busy calendar highlighted by the Fed's favourite inflation indicator, personal consumption expenditures, on Thursday, and November durable goods orders on Friday.
The 30-year bond rose 14/32 to yield 4.64 percent, down from 4.67 percent. Five-year Treasury notes rose 3/32 for a yield of 4.35 percent, down from 4.38 percent. Two-year note yields were at 4.35 percent, down from 4.36 percent.
The two-/10-year yield spread narrowed to 8.3 basis points from 10 basis points.
"A closing break below 6.5 basis points will have a measured objective of parity (zero basis points), and that target could be tested in the last week of the year," said strategists at Action Economics.
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