US Treasury debt prices rallied on Friday as investors stepped back from stocks and took shelter in bonds ahead of a week that promises volatility amid intense debate about the health of the economy. US equities fell after scoring notable gains during the prior two sessions.
The Dow Jones Industrial Average Standard & Poor's 500 index, and the Nasdaq composite each slumped more than 1 percent. "It was definitely a bond-versus-stock trade," said Steve Point, portfolio manager at Glenmede Investment Management in Philadelphia. "Everyone who went long at the bottom in the stock market seemed to be taking profits."
Some investors also decided to shift money into low-risk bonds to hedge against further volatility next week when the Federal Reserve could cut interest rates again and the government will release its monthly employment report, analysts and fund managers said.
"The rally was driven by normalising positions going into next week," said Thomas Higgins, chief economist at Payden & Rygel Investment Management in Los Angeles. With so many questions about the economy and banks, "people looked for an excuse to get out of stocks and into bonds over the weekend," explained Carley Garner, senior analyst with Alaron in Las Vegas.
The benchmark 10-year note's price traded up 1-10/32 at 105-23/32. Its yield, which moves inversely to its price, fell to 3.55 percent from 3.71 percent late Thursday. After the Fed's rate cut on Tuesday, benchmark two- and 10-year Treasury yields fell for the sixth straight week. Traders have also scaled back expectations that the Federal Reserve would trim the federal funds target rate by half a percentage point to 3.00 percent next week.
According to interest rates futures, traders see roughly a 72 percent chance of a half point rate cut, down from 100 percent just two days ago. Anxiety over a recession has eased somewhat, but it is still front and center in the minds of investors.
Higgins called the bond market around its current levels "fairly" priced. "If economic data come in on the stronger side next week then you'll see bonds sell off a bit from here, but not dramatically," he said. "But if the data come in softer, then you'll see bond yields test their lows.