US Treasuries fell on Friday as a stock market recovery damped demand for safe-haven government bonds and comments from Fed officials unnerved optimists hoping for an interest rate cut next month.
Federal Reserve officials said they had done enough with 75 basis points of monetary policy easing since September to cushion the economy's fall in the fourth quarter, even though economic data suggested more stimulus might still be needed.
Shortly after they delivered those comments, news came in of an unexpected fall in US industrial production in October, the latest in a series of troubling signs for an economy already struggling under the weight of a housing downturn.
With data and officials apparently at odds dealers took cues from stocks, which have been the most reliable indicator of demand for safe-haven government bonds in recent weeks.
After several fitful attempts to mount a rally throughout the day stocks made a final push into positive territory heading into the close. "When equities do well and the flight-to-quality bid fades then Treasuries go off and vice versa, so we've been going back and forth," said Tom Spalding, vice president and senior investment officer at Nuveen Investments in Chicago.
Benchmark 10-year notes fell 7/32 in price on the day to yield 4.17 percent, up from an earlier two-year low near 4.13 percent. Prices and yields move inversely. Ten-year yields were down just four basis points on the week after a topsy-turvy ride marked by safe-haven bond rallies followed by sell-offs in the wake of stock market recoveries like the one on Friday.
Two-year notes, which are particularly sensitive to rate cut expectations and safe-haven flows, slipped 2/32 to yield 3.35 percent. Earlier, two-year yields fell to the lowest since early 2005 as credit concerns dominated trade before the stock market mounted the first of several recovery attempts.
Price gains still took two-year yields down about six basis points on the week, though volatile trade produced much wider swings over the course of recent sessions.
Five-year notes fell 4/32 to yield 3.70 percent and 30-year long bonds dropped 7/32 to yield 4.54 percent. St. Louis Fed President William Poole, a voting member of the US central bank's rate-setting Open Market Committee, said it would take unexpectedly weak fourth-quarter data to alter the Fed's view that economic risks are balanced between higher inflation and weaker growth.
In similar comments, Fed Governor Randall Kroszner said the Fed's current policy stance should be just right to help the economy weather a rough patch without triggering inflation. The statements cast doubts on a Fed rate cut in December after markets had reckoned another dose of monetary easing was a near-certain bet, leaving Treasuries vulnerable.
Some money managers say the market is already overbought, and will look particularly expensive in the absence of more bond-positive rate reductions and news that the economy's deterioration has accelerated.
"I think the market is overdone on the Treasuries side. I think it's being very, very pessimistic and taking things to extremes," said Ihab Salib, head of international fixed income at Federated Investors in Pittsburgh. "I'm not saying that things are not going to get worse, but not necessarily to the degree that it is priced in some of these markets."
Interest rate futures retreated to show markets attached a probability of around 85 percent to a cut in the Fed's benchmark rates at its next policy meeting next month, down from 94 percent late on Thursday.