Treasuries outlook: bond prices rise on safe-haven demand, dovish Fed view

Prices on US Treasuries edged up Friday as stocks slipped and on rising investor skepticism over the Federal Reserve's ability to raise interest rates as much as it would like next year. Weakness in stock markets and oil prices added to investor appetite for relatively safe US government debt, as sliding oil prices suggest inflation will remain benign.
"Stocks are sliding a little, oil is falling, pushing Treasuries up a bit and we're in the erratic year-end phase," said Michael Cloherty, head of US rates strategy at RBC Capital Markets, in New York. The US central bank increased its benchmark rate by 0.25 percentage point on Wednesday in a widely anticipated move, causing yields on short-dated maturities to rise sharply.
Fed Chair Janet Yellen made clear that the increase was a tentative beginning to a "gradual" tightening cycle, and that in deciding its next hike the Fed would put a premium on monitoring inflation, which remains below target. "If oil can bounce back then the chances of another hike in the first quarter of 2016 will increase, but at this point people are assuming there isn't going to be a hike before June," said Tom Simons, money market strategist at Jefferies & Co in New York.
Investors expected short-term rates to increase at a faster rate than long-term rates in a bear-flattening move, but the yield curve has been flattening because of demand for longer-dated Treasuries and less because of selling of shorter-dated ones. Treasuries also saw support from investors adding short-dated issues, positioning themselves for the end of the year and ahead of a week of bill sales by the Treasury Department. "Bills have rallied as investors in the front-end look for investments to carry them over year-end," said Simons.
Two-year notes were last up 3/32 in price to yield 0.9522 percent, down from 1.005 late on Thursday. US benchmark 10-year Treasury notes were last up 13/32 in price to yield 2.190 percent, down from 2.238 percent late on Thursday. The US 30-year bond was last up 20/32 in price to yield 2.904, down from 2.936 percent late on Thursday.