Prices of US Treasuries edged up on Friday in light trading, with investors reluctant to take on large positions ahead of a Federal Reserve meeting next week which will be scrutinised for signs on when the US central bank is likely to reduce its bond-purchase program.
Most economists and investors expect the Fed to start to reduce the size of the program in September, though Fed Chairman Ben Bernanke has stressed any pullback is dependent on economic data. The meeting comes two days before Friday's crucial US payrolls report for July, the next major release that will give traders guidance on the likely direction of bond yields.
"A lot of people want to know, is tapering going to start in September," said Dimitri Delis, interest-rate strategist at BMO Capital Markets in Chicago. "I think if you start getting some weaker numbers, you might see some of those expectations being scaled back." The Fed meets beginning on Tuesday, and will release a statement when it concludes on Wednesday.
Yields have risen this week and volatility has picked up as caution ahead of the meeting increased and as the Treasury sold $99 billion in new short- and intermediate-dated debt, weighing on prices. Treasuries got a bid late on Thursday, however, after the Wall Street Journal wrote that the Fed may debate changing its forward guidance to help send the message that it will keep rates low for a long time to come.
Benchmark 10-year notes rose 5/32 in price on Friday to yield 2.56 percent, down from 2.58 percent late on Thursday. The 10-year yields have held in a range from around 2.43 percent to 2.63 percent in the last two weeks, after hitting two-year highs of 2.76 percent on July 8.
Some investors are still nursing losses from the dramatic run-up in yields from around 1.60 percent at the beginning of May as expectations of tapering grew. Volatility also increased this week as traders bet that choppier trading may return next week. The Merrill Lynch MOVE index, which estimates future volatility of long-term bond yields, increased to 82.6 on Friday from 73 on Monday. The index had been falling from a high as 118 on July 5 until this week.
The Fed bought $1.46 billion in bonds due 2036 to 2042 on Friday as part of its ongoing purchase program that includes $85 billion in Treasuries and mortgage-backed debt per month. It will buy between $2.75 billion and $3.50 billion in notes due 2020-2023 on Monday. The Treasury's quarterly refunding announcement on Wednesday will also be a focus for the market.
Some analysts expect the US government to start cutting the size of its coupon-bearing debt sales for the first time since September 2010, as the falling deficit reduces its funding needs. Any cuts are seen likely to start in the shortest maturities, such as two- and three-year notes, before moving to longer-dated debt. Investors will also be watching for any new information about the Treasury's plan to introduce floating-rate notes, which are expected as soon as the fourth quarter of the year.
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