Treasuries flat

US Treasury prices traded flat on Monday as traders concluded the global war on terror and related safety bids for bonds will continue even after US forces killed al Qaeda leader Osama bin Laden. Bond prices fell overnight on initial optimism that the death of bin Laden would ease geopolitical risks and on the protracted safe-haven premiums on Treasuries since the attacks on the United States on September 11, 2001, analysts said.
That view faded as investors and traders reckoned the development was not a catalyst that would stop the fighting in Libya or soothe Middle East tensions. "It's a great morale booster for the US, but the war on terror continues. That's not going to go away," said Charles Comiskey, head of Treasury trading at the Bank of Nova Scotia in New York.
Instead, investors turned to economic fundamentals as well as last week's pledge from the US Federal Reserve to leave interest rates near zero as it completes a $600 billion bond program, known as QE2, at the end of June.
Offsetting the positive factors for Treasuries were this week's expected $15 billion to $20 billion corporate bond supply and reticence to make big bets ahead of Friday's US payrolls data, analysts said. The April labour report is widely expected to reinforce the view that US job growth is too low to motivate policymakers to hike interest rates this year, but traders often refrain from making bets before the report's release each month.
Bonds bounced in a narrow range on light volume, with yields hovering at their lowest levels since mid-March. Prices fell after a mildly better-than-expected government reading on construction spending and a report on manufacturing from the Institute for Supply Management. They touched session highs in late-morning trading as traders bought longer-dated Treasuries to sell to the Fed.
The US central bank bought $7.24 billion in debt due in eight to 10 years on Monday, part of its QE2 purchase. Benchmark 10-year Treasury notes last traded up 3/32 in price, rebounding from an earlier loss of 9/32. The yield was 3.28 percent, down from 3.29 percent on Friday, after touching a session high of 3.32 percent. The bond market took a breather after an April rally that pushed it into positive territory for the year, although some traders cautioned about the risk of pullbacks in advance of next week's quarterly refunding.
The US Treasury Department will announce its current quarter borrowing requirements at 3 pm EST (1900 GMT) and details on the May refunding on Wednesday. Barclays Capital's total return index on Treasuries rose 1.15 percent in April and has gained 0.99 percent so far this year.
Its index on Treasury Inflation-Protected Securities (TIPS) fared even better last month, despite data showing that core inflation remained muted and the Fed's assurance that inflation expectations were anchored. Barclays' TIPS index rose 2.51 percent, nearly matching the 2.52 percent increase recorded by its return gauge on long-dated corporate bonds, which was the best performing US bond sector in April.
With oil prices stuck above $100 a barrel and a persistent rise in other commodity prices, some gauges on inflation expectations have been rising despite the Fed's tame outlook. If inflation does spread into the broader economy, long-dated Treasuries will be hurt, Stark said. The 30-year bond, the longest US Treasury maturity, last traded flat in price to yield 4.39 percent.