Treasuries dip

US Treasury prices eased on Thursday in profit-taking from a recent rally that propelled benchmark yields to 16-month lows, although losses were limited as lower stocks maintained some of bonds' safe-haven allure. The price dip was briefly extended on Thursday afternoon following the auction of $16 billion of 30-year bonds, the last leg of this week's $74 billion quarterly Treasury refunding.
Treasuries got a strong boost earlier in the week from the Federal Reserve's announcement to deploy funds from maturing mortgage holdings to buy government bonds. "Overall the market looks tired after the run-up we had the last few days," said Robert Tipp, chief investment strategist with Prudential Fixed Income in Newark, New Jersey.
Benchmark 10-year Treasury notes were yielding 2.75 percent on Thursday, up slightly from the high yield of 2.73 percent in an auction of $24 billion of the notes Wednesday. Ten-year yields touched a 16-month low of 2.68 percent Wednesday as the Fed's policy shift to more stimulus spurred Treasury appetite. However, despite some selling on Thursday, some analysts said they would not be surprised to see bond prices resume their climb.
"There is still some room to the downside in yields - 2.50 percent is going to be psychologically tough to push through," said Bill Bemis, securitized portfolio manager with Aviva Investors North America in Des Moines, Iowa. "There is an acknowledgement that rates are going to be low for the foreseeable future with the Fed essentially putting a backstop on rates." However, the market on Thursday retreated from gains this week that were driven in part by the Fed acknowledging the economic recovery was slowing, which fuelled safe-haven buying.
Thirty-year bonds traded 16/32 lower in price to yield 3.95 percent, up from 3.92 percent late Wednesday. After the spread between 10- and 30-year yields hit a record wide on Wednesday, the sentiment on the 30-year improved, prompting traders to put on "flattener" trades - which involve heavier selling of 10-year or other shorter maturities rather than the 30-year bond, analysts said. These flatteners helped narrow the spread between 10-year and 30-year yields to 120 basis points on Thursday.
The Fed's renewed purchase of Treasuries is intended to lower mortgage rates and other long-term borrowing costs in a bid to stimulate borrowing and investments, which is vital to sustain the economic recovery that began a year ago. Two-year Treasury notes traded 2/32 lower in price to yield 0.55 percent, up from 0.52 percent late Wednesday. Two-year yields hit a record low of 0.49 percent Wednesday.