US Treasury debt posted solid price gains on Friday as benchmark yields breached key technical levels and investors tested the lower boundaries of a recent range.
Amid a vacuum of economic data, traders appeared to think that a six-month high in benchmark yields reached at the start of the week made bonds attractive enough to warrant some buying.
Yields had peaked at 4.53 percent but failed to hold above the 4.50 percent mark, shifting the momentum in bulls' favour and triggering a week's worth of solid gains.
On Friday, ten-year notes rose 13/32 and were yielding 4.39 percent, down from 4.44 percent on Thursday and boosted in part by demand related to expiring options contracts.
"This is keeping a strong bid in the bond market and forcing shorts to cover," said Andrew Brenner, head of fixed-income at Investec US He pointed to 4.32 percent and 4.25 percent as the next two levels to be tested.
At the margins, falling oil prices may have alleviated ongoing fears about inflation. Crude oil dipped beneath $60 a barrel this week for the first time since July, tempering concerns that high energy prices would stoke broader inflation.
But analysts said that in the absence of major economic data releases, technicals were the dominant factor pushing bonds prices higher and yields lower.
"The Fed governors are banging on the drums about how inflation is a concern - and through all of that, Treasuries have not been able to break through some very key support levels," said Alan De Rose, a trader at CIBC World Markets.
"When you have a situation like that where the market can't go with the news, then ultimately it tries to test it the other way," he said.
That was indeed what Treasuries looked to be doing, with two-year notes rising 1/32 for a yield of 4.21 percent from 4.23 percent.
Five-year notes added 6/32 to yield 4.26 percent from 4.30 percent, while the 30-year bond jumped 30/32 to yield 4.60 percent.
With gains concentrated in longer-dated maturities, the yield curve resumed its flattening trend. Spreads between 10- and two-year debt narrowed to 17 basis points from 20 on Thursday.
If there was any fundamental economic underpinning to the market's gains, it was the suspicion that high gasoline and home heating prices could sap consumer spending just as the key holiday shopping season gets underway.
But even if this happens, optimists at banks like J.P. Morgan argue that an apparent rebound in manufacturing and investment would probably make up the difference, allowing economic growth to continue humming along at a respectable clip.
Yet for now, this prospect did not seem to daunt a bond market that had quite simply gotten tired of moving lower.
Given the number of uncertainties facing the US economy - soaring energy costs, fears of a housing bubble, gaping trade and budget deficits - dealers reasoned that safe-haven bonds were not such a bad place to be.
The Treasury Department said on Friday it asked bond dealers about risks and uncertainties regarding the 2006 budget. Officials from Treasury are scheduled to meet with primary dealers October 27-28 and to announce quarterly refunding plans November 2, the department said.
Treasury also asked dealers to comment on moving 5-year note auctions to the end of the month, rather than holding them in the middle of the month, to accommodate 30-year bond offerings, which the government is expected to resume in the first quarter of 2006.