US Treasury debt prices could rise further, building on this week's gains, if the Federal Reserve were to step up its purchases of US government debt with the goal to hold down borrowing costs.
Steepening losses on Wall Street may also revive some safety bids for bonds and other lower-risk assets, analysts and investors said on Friday. "The market may stabilise here and perhaps do a little better," said Tom Girard, who helps to manage $115 billion of fixed-income assets at New York Life Investments in New York.
The Treasuries market snapped its worst losing streak in five years on Friday when benchmark yields ended lower on a weekly basis for the first time since mid-March. Optimism that the economy is emerging from recession, together with worries about $2 trillion in new government debt this fiscal year had recently propelled the 10-year Treasury yield to its highest level in five months.
This week's weaker-than-expected data on retail sales in April and a resurgence in jobless claims undermined confidence of an economic recovery later this year. They spurred investors to book gains on spread products like corporate bonds, which have been faring better than Treasuries so far this year. "We've recently began taking profits on non-Treasury products and moved back to Treasuries," Girard said.
On Friday, the price on benchmark 10-year Treasury notes finished down 11/32 at 99-28/32. Their yield, which moves inversely to their price, rose 5 basis points on the day to 3.14 percent, down from 3.29 percent a week ago.
Wall Street ended the week on a negative note due to weaker energy shares and profit-taking on bank stocks. The major US stock indexes were down as much as 1.1 percent.
FED PURCHASES:
Fed's buying of long-dated supply, in the absence of new supply for a second straight week, should be the major positive force for Treasuries, analysts said.
"It's got to be the biggest variable out there," said Howard Simons, market strategist with Bianco Research in Chicago. The Fed is scheduled for three rounds of Treasury purchases next week. It aims to buy debt maturing in 10 to 17 years on Monday; Treasuries due six to 10 years on Wednesday and securities maturing in four to seven years on Thursday.
The US central bank has snapped up about $105 billion in coupon Treasuries since late March. The purchases are part of a $300 billion program it announced two months ago in a broader scheme to buy securities intended to lower private borrowing costs and to stimulate economic activity.
It is too early to judge the success of the Fed's asset purchases, which has more than doubled its balance sheet to over $2 trillion since last autumn, analysts said. Recent data suggest the Fed's and other government efforts may be paying off in terms of slowing the economic slide in late 2008 through early this year, according to analysts. "The economy is not falling off a cliff. There are still hopes things will be getting better," New York Life's Girard said.
Next week's data calendar is rather light ahead of the three-day US Memorial Day weekend. The latest readings on housing starts, jobless claims and Mid-Atlantic business activity from the Philadelphia Fed will likely garner the highest market interest, analysts said.