Treasuries outlook: long-dated yields advance; 10-year rises for sixth week

US long-dated Treasury debt yields edged higher on Friday, continuing a trend that has been in place for several weeks, with investors consolidating some positions ahead of what is expected to be a quiet holiday period for economic data. Benchmark US 10-year yields posted six straight weeks of gains.
The Federal Reserve's interest rate forecasts on Wednesday showed three more rate increases in 2017, accelerating a selloff that started with the victory of US President-elect Donald Trump on the expectation of more inflationary infrastructure and fiscal spending. "In the week ahead, the Treasury market faces a dearth of economic data and with little on the calendar to suggest any looming event risk, we're anticipating another period of consolidation as the higher yield range continues to be defined," said Ian Lyngen, head of US rates strategy at BMO Capital Markets in New York.
"We're still constructive on Treasuries and while we were frankly surprised by the market's response to the Fed, the selloff did give us better placement to play the market from the long side," he added. Treasuries further sold off, pushing yields higher, after Richmond Fed President Jeffrey Lacker said on Friday the US economy likely needs more than three rate hikes next year. He added that a burst of demand would likely require a steeper path of rate increases.
A sharp drop in US housing starts for November, meanwhile, briefly weighed on yields, which move inversely to prices. Data showed US new housing projects dropped 18.7 percent to a seasonally adjusted annual rate of 1.09 million units. October's starts, however, were revised up to a 1.34 million-unit rate, the highest since July 2007. In late trading, 10-year Treasury note prices were down 6/32, yielding 2.600 percent, up from Thursday's 2.578 percent. On the week, 10-year yields have gained 13 basis points.
US 30-year bond prices were down 24/32, yielding 3.185 percent, up from 3.145 percent late on Thursday. Yields on US two-year notes, the maturity most sensitive to interest rate expectations, were at 1.256 percent, down slightly from 1.264 percent the previous session. The note has gained 12 basis points in yield this week. The yield curve was also flatter, with the spread between US 5-year notes and 30-year bonds hitting as narrow as almost 103 basis points. That was the flattest since early September, as investors priced in aggressive tightening by the Fed next year.