US Treasury debt prices firmed modestly on Tuesday, pulling yields just below five-and-a-half-month peaks as dealers ignored firm consumer confidence data ahead of a Fed interest rate decision and economic data later in the week.
A few buyers were tempted into the market on the perception that bonds were oversold after two months of price declines, some analysts said. Dealers expect the Federal Reserve to keep the fed funds overnight lending rate on hold at 5.25 percent when its two-day meeting ends on Wednesday, so they will look to the central bank's policy statement to decide whether to continue the sell-off that has gripped the bond market since early December.
Bond investors "have been taking long positions mainly because the market is a bit oversold," said Tony Crescenzi, chief bond market strategist with Miller, Tabak & Co in New York. Tuesday's consumer confidence reading for January - which rose slightly, as expected - came ahead of a deluge of other reports this week that includes economic growth data on Wednesday, an inflation gauge on Thursday and a jobs report on Friday.
"The primary theme has to be the preparation the market has had for the idea there would be maybe some firming up of the language in the policy statement and in economic growth prospects," Crescenzi said. But for yields to go much higher the bond market would have to start pricing in rate hikes, Crescenzi said, something he considers unlikely because of the weak housing market.
Taken together, this week's events will provide a key update on the state of the US economy and make the case for the market either to reverse or continue the downward slide in bond prices. The slide has hit longer maturities in particular over the last week and pushed two- and 30-year yields to 5 percent. Benchmark 10-year notes were up 3/32 in price for a yield of 4.88 percent, versus 4.89 percent late on Monday. Two-year notes were up 1/32 in price, yielding 4.97 percent.
"The market is more worried about the Fed meeting, GDP and employment," than about the consumer confidence data, which was in line with expectations, said Mario DeRose, fixed-income strategist at Edward Jones in St. Louis. The Conference Board's US consumer confidence index rose to 110.3 in January, slightly above the 110.0 median forecast by economists in a Reuters poll.
The first reading of US fourth-quarter gross domestic product, due at 8:30 am (1330 GMT) on Wednesday, is expected to have risen 3.0 percent, according to economists' median forecast.
The 30-year bond was up 7/32 in price, pushing the yield down to 4.98 percent, below Monday's peak of 5.01 percent, the highest since mid-August. Five-year notes traded up 2/32 in price to yield 4.87 percent. Ten-year yields were about nine basis points below those on two-year debt, keeping the yield curve inverted, though it is now at its least inverted since early December.
Just over a week ago, 10-year debt was yielding 15 basis points less than two-year paper. The recent move in the curve has accompanied declining expectations for Fed rate cuts any time soon.
"I'm surprised the level of inversion has narrowed to what it has and all I can think is it is just due to expectations that inflation is still going to remain above the Fed's target and that is going to keep Fed policy on hold," said Mary Ann Hurley, vice president of fixed-income trading at D.A. Davidson & Co in Seattle.
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