US debt prices climb

US Treasury debt prices rose on Thursday and five-year note yields dipped to the lowest since at least the 1960s, a day after the Federal Reserve said it will likely hold interest rates near zero at least through late 2014. Clear dovish signals from the Fed after a policy meeting on Wednesday and fears that the European debt crisis was heating up again could continue to underpin Treasuries in the near term.
"The Treasury market, most notably the intermediate sector, should continue to trade extremely well for the foreseeable future. With the Fed's new pledge and the crisis in Europe the historically low rates are likely to be here for quite some time," said Justin Lederer, Treasury strategist at Cantor Fitzgerald in New York. Fed Chairman Ben Bernanke said on Wednesday the US central bank was ready to offer the economy additional stimulus after the Fed said it would likely keep interest rates near zero until at least late 2014.
The Fed also took the historic step of adopting an explicit inflation target and many market participants came away thinking the chances of a new round of quantitative easing measures were high.
"The Fed kept the door open on QE3 and did so by reiterating its intent to use the balance sheet to help foster a recovery they continue to see as anemic," said David Ader, head of government bond strategy at CRT Capital Group in Stamford, Connecticut, in a note to clients on Thursday. "The market responded with a vicious flattening rally which turned the bearish technicals back to bullish."
Benchmark 10-year Treasury notes traded 16/32 higher in price to yield 1.94 percent, down from 2 percent late Wednesday, while 30-year bonds were 29/32 higher to yield 3.10 percent, from 3.15 percent. Five-year note yields dipped to as low as 0.75 percent, marking their lowest level since at least the 1960s.
Charlie Parkhurst, managing director at Barclays Capital in New York, said his Treasury trading desk was seeing strong buying in five- and seven-year notes from so-called "fast money" investors - short-term traders and hedge funds likely scrambling to cover short positions in the belly of the yield curve.
"But after yesterday's rhetoric from the Fed we're seeing lots of people grabbing that part of the curve," Parkhurst said. In Europe, Portuguese five- and 10-year government bond yields rose to euro-era highs on worries that the country may follow in Greece's footsteps and require a second bailout or restructure its debt.
US Treasury price gains were pared briefly on Thursday afternoon following the sale of $29 billion of seven-year Treasury notes, which brought a record low yield at auction. The yield, however, was higher than the market expected, indicating buyers' reluctance to step in at current levels.
"We view the auction weakness as a strong signal from the market that intermediate and long-term rates cannot be controlled by a Fed on hold," said George Goncalves, head of US interest rates strategy at Nomura Securities International in New York. Price gains also faded briefly on Thursday morning after new orders for US manufactured goods rose more than expected in December on strong demand for aircraft, while a rebound in a gauge of business spending plans suggested investment closed the year on the upswing. Jacob Oubina, senior US economist at RBC Capital Markets in New York, said the durable goods data suggested manufacturing was entering 2012 on an up note. "Heading into the first quarter, the momentum is going to be pretty decent," he said.