US Treasury prices gained on Friday as uncertainty about recent stock market volatility helped boost demand for the bonds and as investors rebalanced portfolios ahead of month-end. Continuing nerves about the direction of stocks led some investors to seek out lower-risk assets.
"There's been some substantial buying that seems to be sustaining amid concerns about the equity markets," said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott in Philadelphia. "We're also entering the month-end rebalancing period and after the spurt of volatility we had in all markets, but particularly in equities, it may encourage some rebalancing towards fixed income," LeBas said.
Fixed-income index extensions this month are larger than normal, which may be driving more month-end activity. "We're going to have an above average month-end extension," said Mike Lorizio, a senior fixed income trader at Manulife Asset Management in Boston. "I think some of that month-end buying is coming in here at levels that look relatively attractive."
Investors that were underweight bonds were also seen as repositioning after the two-month selloff. Futures data shows that "some investor classes have got a bit toward extreme levels of underweight duration in the back-end, and I think we're seeing profit-taking or some reversing of that," Lorizio said.
Benchmark 10-year notes gained 14/32 in price to yield 2.868 percent. The yields have fallen from a four-year high of 2.957 percent on Wednesday. Bonds were also supported on Friday by the completion of $258 billion in new supply this week, which was the second largest ever over a three-day period.
Investors will turn their attention to Federal Reserve Chairman Jerome Powell's first semi-annual monetary policy testimony to Congress on Tuesday and Thursday, which will be watched for any update on the US central bank's economic forecasts in light of the Trump administration's tax cuts and spending plans, and a recent uptick in inflation.
"It's not just the recent data, because in the short term it's very random, but on the Fed's level of confidence in inflation over the next six to 12 months," said LeBas, adding that inflation "will establish whether we see three or four rate hikes during the year." Data next Thursday on personal income and spending in January will give the next indication of price pressures in the economy.
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