US Treasury debt prices slipped on Friday, taking a breather after a week of strong gains on comments by Federal Reserve Chairman Ben Bernanke that fuelled hopes the Fed was near the end of its rate-raising cycle.
Bernanke's signal to bond investors that long-term US inflation expectations were fairly contained helped stoke the strongest three-day rally in US government bonds in a month. Earlier, the benchmark 10-year note's yield briefly dipped toward the key 5 percent mark.
But that zone proved to be a floor for most maturities' yields, for now. The 10-year note fell 4/32 in price for a yield of 5.05 percent, compared with 5.03 percent late on Thursday and 5.01 percent earlier in Friday's session. Bond yields and prices move inversely.
"The market had moved into territory that would suggest the Fed was on the brink of delivering a rate cut," but that does not appear to be in the cards for some time, said Tony Crescenzi, chief bond market strategist with Miller, Tabak + Co in New York. A 5 percent yield on the 10-year note "is an area that many are not willing to go," he added.
US interest rate futures signalled a roughly 43 percent chance that the Fed would raise rates by another 25 basis points, to 5.50 percent, at its August 8 meeting. The Fed has raised interest rates at every meeting in the past two years, taking the federal funds rate to 5.25 percent.
Minutes from the Fed's last policy meeting released on Thursday showed that board members felt the future path of monetary policy was facing "significant uncertainty." That briefly prompted more traders to cover short positions. Government bonds remained supported by expectations of a pause in the Fed's rate tightening campaign. Investors are also buying longer-maturities on expectations of rate cuts next year as the economy slows, which could dampen inflation pressures.
Analysts reckon the odds of another hike in August have been somewhat pared back since Bernanke's testimony to Congress on Wednesday in which he said that long term inflation pressures should be fairly contained. As a result, some fixed-income investors expect bond yields to move lower.
"Over the next three to six months, I think the trend is toward lower rates. Somewhere in the fourth quarter, we will start trending toward 4.50 percent on the 10-year note," said Sharon Stark, chief market strategist at Stifel Nicolaus & Co in Baltimore. "It shows that inflation is no longer a significant threat to the economy and that we are in a slower period of economic growth," she said.
However, some bond market analysts warn that persistently high energy prices might cause inflation pressures to rise, pushing up long-dated bond yields.
Two-year notes were unchanged in price at a yield of 5.08 percent, compared with 5.07 percent late on Thursday. The 30-year bond was down 8/32 in price for a yield of 5.10 percent compared with 5.08 percent late on Thursday.
The market gave a guarded response to news that the Chinese central bank will raise reserve requirements in August as investors digested how the move might affect China's currency and its interest rates. Treasuries also did not seem to draw much support from heightened tensions in the Middle East.