Shorter-dated US Treasuries tumble

Shorter-dated US Treasury debt prices eased on Friday as traders worked to cheapen the notes ahead of next week's massive round of government debt supply. Losses were limited however, particularly in longer-dated maturities, as weaker stocks and ongoing worries over Greece's fiscal problems maintained at least some of the safe-haven allure of US debt.
The Treasury Department next week will sell $44 billion in two-year debt, $42 billion in five-year notes, and $32 billion in seven-year debt. New money from these auctions will help fund an expected $1.5 trillion federal deficit in fiscal 2010. Two-year Treasury notes traded 2/32 lower in price to yield 1.00 percent, the highest yield in over two months and up from 0.97 percent late Thursday.
Ten-year notes traded 4/32 lower in price to yield 3.70 percent, up from 3.68 percent late Wednesday. Prices losses on Friday also were limited by some expectations that next week's auctions could be met with solid demand. Friday's price action again flattened the Treasury yield curve, with the spread between yields on two-year and 10-year notes narrowing to 270 basis points, the tightest this year.
The spread is a barometer of the market's inflation expectations, and has tightened this week after data showing benign US inflation pressure in February. In the absence of top-tier data, there was lingering speculation over whether the Federal Reserve will raise interest rates on direct loans it makes to banks to remove excess reserves from the banking system.
The $1 trillion in excess bank reserves has worried some economists on views they would cause a resurgence in inflation when the economy gains speed. On Thursday, chatter of a discount rate hike, which would be the second since February 18, knocked the euro to session lows against the dollar and exerted downward pressure on US short-term interest rates futures.
A Fed spokesperson, when asked about this market speculation, said the Fed does not comment on rumours. Five-year Treasury notes traded 6/32 lower in price to yield 2.46 percent, up from 2.42 percent late Thursday, while 30-year bonds traded 9/32 higher in price to yield 4.58 percent from 4.60 percent.