US Treasuries could continue rallying next week as the torrent of government bond issuance pauses and investors take a reality check on hopes for an economic rebound, analysts said. Traders will also scour for more clues on how the Federal Reserve can eventually withdraw liquidity from fixed income markets.
Central bankers meet in Jackson Hole, Wyoming to discuss the tricky task of gradually turning off the tap of governments' emergency liquidity injections made during the global financial crisis. This week, the Fed signalled it would likely stop its government bond purchases by the end of October.
However, helped by signs that the US consumer may take longer than expected to recover from the most protracted recession in decades, the benchmark Treasury note had its strongest rally since December. The benchmark 10-year US Treasury note's yield, which moves inversely to its price, fell to 3.57 percent late on Friday, down nearly 30 basis points on the week, for the strongest weekly performance year-to-date.
Unless there are signs that the recent stabilisation in the economy will become sustained, the 10-year yield will probably stay below 4.0 percent over the near term, said Tony Crescenzi, strategist and portfolio manager with Pacific Investment Management Co in Newport Beach, California.
The 10-year yield rose to that level during an early June selloff which was driven by investors' shift out of government bonds into riskier assets such as stocks and corporate bonds on expectations the economy would soon improve. But now that economic optimism is fading fast.
Treasuries will probably build on this week's gains next week, said California State's Sung. "After a burst of strong economic numbers, we are beginning to see weaker ones," he said, citing recent retail sales and consumer confidence data. The consumer accounts for some 70 percent of US economic activity.
Worries about feeble consumer spending are already weighing on stocks and may bring more flows back to the weak economy refuge of the US government bond market. Government securities rallied this week despite absorbing $75 billion of supply in notes and bonds: a potentially negative factor for the market. Yet some analysts warn that should housing and manufacturing data prove stronger than anticipated, that could weigh on government bond prices.
Recent hints of stabilisation in the housing market in some places after prices slumped by a third over three years raised hopes this cornerstone of the economy may be finding a footing. The National Association of Homebuilders index for August, due for release on Monday, is forecast to edge up to a reading of 18 from 17 the month before. Housing starts and existing home sales reports for July follow later in the week.
As manufacturers meet a temporary rebound in demand, data is starting to show new orders rising, which may be reflected in regional manufacturing reports such as the New York Empire State Index for August due on Monday. Economists expect the index to rise to a reading of 2.50 in August from minus 0.55 the month before, according to the median forecast.
Comments
Comments are closed.