US Treasuries turned positive on Friday, rebounding from earlier losses in the wake of the Federal Reserve's surprise hike in its emergency lending rate on Thursday. The Fed's rise in the discount rate it charges banks were its first interest rate move since December 2008, and sparked a sell-off in bonds.
The market recovered ground in light trading volumes through Friday's session after Fed officials insisted the increase in the discount did not signal a change in monetary policy and said borrowing costs would remain low. Adding support to Friday's comeback was data showing the US Consumer Price Index, a key gauge of inflation, rose less than expected in January.
The benchmark 10-year note was up 6/32 to yield 3.78 percent, versus Thursday's close of 3.81 percent, near the end of the session. Two-year note yields briefly touched a one-month high. They were last trading flat on the day, yielding 0.92 percent. Losses earlier in the session pushed two-year yields as high as 0.97 percent, the highest since January 11.
Bond investors fought cross currents of worries about looming bond auctions next week and uncertainty about when the Fed would eventually raise rates. The US Treasury is scheduled to sell a record $126 billion in coupon debt next week. The stock market's rebound from earlier losses also tempered the recovery in safe-haven Treasuries. Analysts couldn't help wondering what moves the Fed has planned next, making it difficult for bonds to gain significant traction.
The Fed has been engaged in a program of extraordinary measures aimed at stemming the worst financial crisis since the Great Depression, including purchases of assets such as mortgage securities, also known as "quantitative easing." The mortgage purchases will finish by the end of March, leading to worries of a broad sell-off in bonds in general as a huge buyer of fixed income disappears. Analysts said worries over this explain the recent weakness in longer-dated Treasuries and in the lack of a full-blown rally after Friday's bond-friendly inflation data.
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