Most US Treasuries prices retreated on Friday as traders cut prices ahead of supply in the coming week, but demand for short-term debt before the year's end pushed those yields to 11-month lows. The Treasury will sell $118 billion in two-, five- and seven-year notes in three separate auctions next week before markets close on Thursday for the Thanksgiving holiday.
Demand for Treasury debt has remained robust all year, despite the ample supply of notes entering the market through three Treasury note auctions every other week. One reason is that year-end demand for short-dated funds has pushed short-term yields so low that investors who want even a modest return must buy longer-dated notes.
An early rally pushed two-year yields to 11-month lows on Friday as investors sought safe-havens to ride out the often volatile closing weeks of the year. "Financial institutions want to show gilt-edged assets on their balance sheets for the year-end statement," said William Sullivan, chief economist at JVB Financial Group in Boca Raton, Florida.
Reflecting demand for shorter securities, the two-year Treasury note's price was down just 1/32, its yield at 0.73 percent, a slimmer loss than longer-dated Treasuries suffered. Early in the session, the two-year yield fell just below 0.68 percent, its lowest since December 2008 when short-term securities were in demand partly because of the usual end of year pressures but also because of general nervousness about the financial system.
Other short-dated Treasuries also offered lower returns on Friday. One-year notes were up slightly in price, yielding just 0.269 percent. Three-month bill rates dropped to 0.015 percent, barely over zero and the lowest since late December.
Analysts said the dominant flow in bonds favoured short-dated debt, financial markets' favourite safe haven, since many investors were eager to lock in gains from a stunning, 60-percent US stock market rally that started in mid-March. "A lot of people are looking to move into cash-like assets ahead of year-end, taking profits in other asset classes and lock down their books for the year," said Carl Lantz, an interest rate strategist at Credit Suisse in New York.
"It's happening a little earlier than usual this year, but that's just people front-running the activity." In contrast to the demand for short-dated instruments, five-year notes were down 5/32, their yields rising to 2.18 percent from 2.15 percent at Thursday's close.
Traders also pointed to the Thanksgiving holiday Thursday when US markets will be closed. Generally, market liquidity during a holiday week decreases, as trading volume drops. "It's kind of a classic pre-Thanksgiving trade, where the expectation that there's going to be a liquidity dry-up is having people try to move a bit closer to home," Lantz said.
Dealers will also likely focus on stocks in coming weeks. Though fixed income and equities moves had become less correlated than they were earlier in the year, stock indexes are likely to provide a good gauge of year-end risk aversion. A rise in risk aversion favours shorter dated Treasuries.
"The tone is set for a bid to fixed income markets," said Christian Cooper, an interest rate strategist at RBC Capital Markets in New York. "We're going to continue to see a bounce of short covering and a reallocation of cash to the front of the curve."