US Treasuries rose on Friday with the help of soft economic data and relief over a pause in government bond auctions, but the market remained vulnerable as it closed in on its worst sell-off since 2003. As was the case six years ago, hopes of economic recovery have hurt conservative investments such as government bonds, though this time around worries over the burgeoning US budget deficit have also hammered Treasuries.
Huge borrowing needs produced $101 billion of government note auctions this week alone, which matched a record set in April and added to the flood of debt saturating the market.
The sharp and swift rise in yields has fed on itself recently, forcing a wave of selling from mortgage investors that now appears to have run its course, while traditional month-end buying has also helped reverse falling bond prices.
"All the factors that were leading us down have withdrawn and we're starting to see some real buying," said Rick Klingman, managing director of Treasury trading at BNP Paribas in New York. The benchmark 10-year Treasury note was last up 20/32, yielding 3.53 percent versus 3.61 percent at Thursday's close.
Benchmark yields have risen 86 basis points so far over the course of April and May, which would be the biggest two-month jump since August 2003. Weak economic reports on Friday reminded investors that the road to recovery from the worst recession in decades will be bumpy, restoring some of the allure of safe-haven government bonds.
The US economy contracted at an annual rate of 5.7 percent in the first quarter, a slightly smaller drop than initially estimated but worse than analysts' expectations. Lending further support to bonds, data showed business activity in the US Midwest contracted in May at a much more severe rate than expected.
Dealers saw any gains as a victory after recent worries over the cost of financing the national debt hammered longer-dated bond prices, which steepened the difference in their yields versus shorter maturities to the highest on record. "At least there is something there to give Treasuries a little support. It has been a nasty bear steepener this year," said Steve Van Order, fixed income strategist at Calvert Asset Management Co in Bethesda, Maryland. Other data showing consumer sentiment improved slightly more than expected in May had little immediate effect on the market.
The 30-year long bond was up 1 full point, yielding 4.42 percent versus Thursday's close of 4.49 percent. Two-year notes were up 2/32, yielding 0.94 percent versus 0.98 percent late on Thursday. Still, the rally in longer-dated Treasuries reduced some of the steepness of the yield curve after the difference between two- and 10-year notes jumped to its widest on record during Wednesday's bond market rout.
A steep yield curve is considered a harbinger of economic recovery and particularly helpful to banks' profitability. However, longer-dated bonds have suffered due to uncertainty over the rising government debt load and worries the Federal Reserve's loose monetary policy will spur future inflation.