US Treasury debt prices eased on Friday as a rebound in stocks gave investors an excuse to take profits on the prior session's mammoth gains. A sharp retreat in crude oil prices to around $116 a barrel underpinned the recovery in equities, and was also offering some support to longer-dated bonds, with the brunt of selling concentrated in shorter maturities.
Two-year notes were down 5/32 for a yield of 2.51 percent, up eight basis points on the day. Ten-year note yields, in contrast, were up just one basis point at 3.94 percent.
The drop in Treasuries was mild given the bumper day for stocks, in part because armed conflict between Russia and Georgia kept some measure of a safe-haven bid in the bond market. The Dow Jones industrial average surged more than 320 points, or 2.8 percent.
"There were some geopolitical concerns along with spike in stocks so that limited the sell-off in Treasuries," said Matthew Moore, economic strategist at Banc of America Securities. But credit concerns were hiding not very far away. Mortgage giant Fannie Mae reported its fourth straight quarterly loss, a larger-than-expected $2.3 billion.
This created an early impetus for buying in Treasuries, although that quickly vanished once equity shares got off to the races. Rising share prices also swept away any benefits to government debt from relatively benign economic data. US worker productivity jumped 2.2 percent in the second quarter, leading to a weaker-than-expected 1.3 percent rise in labour costs and indicating that higher inflation expectations have yet to translate into demands for better wages.
With the government's two-leg refunding auction now over, and largely considered a success, traders felt more comfortable with the market trading in its current range.
The 30-year auction in particular, conducted on Thursday, surprised investors, garnering the largest indirect bid since the long bond was reintroduced in 2006. The fall in oil prices helped ignite a major dollar rally, putting the US currency on track for its biggest daily gain in six years against the euro.
The dollar's recovery was a talking point among bond strategists. Although it was not a clear directional cue for Treasuries on Friday, longer term, if the perceived risks of a dollar crisis diminish, that could help reinforce demand for US government bonds among foreign investors who hold a big chunk of the market.
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