US Treasury debt prices rose on Monday as bargain-hunting emerged after weeks of heavy selling amid signs of renewed growth and fading prospects for the Federal Reserve to trim interest rates this year. The market clung to modest gains despite a late recovery in stocks with the Dow Jones industrial average closing at a record high.
Stocks, whose strength had been a major negative factor for bonds, had started weaker after an 8 percent drop in Chinese stocks in the wake of last week's hike in the tax on stock trades. "There are some bargain-hunters for whom these yields are somewhat attractive," said Terry Belton, head of US fixed-income and derivatives strategy with J.P. Morgan Securities in Chicago.
The past month has been tough for Treasuries, with yields climbing as much as 40 basis points as improving economic data prompted investors to pare back expectations for the Fed to cut interest rates. Benchmark 10-year notes were traded up 5/32 in price for a 4.93 percent yield, down from 4.95 percent late on Friday and below the 10-month peak set late last week.
Monday's data on factory orders had little impact, but upward revisions to April durable goods did confirm a pickup in business investment early in the second quarter. Given more data showing an improving economy, many believed any bond gains would be short-lived.
"It's not a terribly significant bounce," said John Canavan, market analyst at Stone & McCarthy Research Associates in Princeton, New Jersey. "We are just stabilising here." Bond bulls were still smarting from the double blow of surprisingly strong payroll growth in May and signs of recovery in US manufacturing, both reported on Friday. Merrill Lynch said on Monday it expects the Fed to hold the benchmark overnight federal funds rate at 5.25 percent for the rest of the year, in contrast to an earlier forecast of lowering its target rate to 4.25 percent.
The next major hurdle for the market could be a speech from Fed Chairman Ben Bernanke on Tuesday, entitled "Housing and the Economy." Treasuries could get a boost if Bernanke reiterates the assessment contained in the minutes from the central bank's latest meeting that the troubled housing sector could prove a more prolonged drag on growth than previously estimated.
In cash trading, two-year notes were unchanged in price for a yield of 4.97 percent, while five-year debt were up 2/32 in price to yield 4.91 percent, down 2 basis points from late Friday.
The long bond ended up 15/32 for a yield of 5.03 percent, down from 5.06 percent late on Friday. In the derivatives market, swap spreads were unchanged to 0.75 basis point tighter than late Friday with 10-year spreads at 57.00 basis points.