US Treasuries fell in price on Friday, capping a week of very aggressive selling, spurred by the outlook for better economic growth, leaving the downtrend of the past six weeks intact. Bond dealers also sold Treasuries to lock in yields on the corporate bonds they will underwrite next week, while investors reduced bond holdings after US government data on international trade and consumer confidence suggested stronger-than-expected economic growth in the fourth quarter.
Friday's selling meant the rise in Treasury yields was the biggest for a week since August 2009, and the move could set the tone for Treasuries trade in the near term, said Kim Rupert, managing director of global fixed income analysis at Action Economics in San Francisco.
"Yields are going to remain biased higher, but not in a straight line," Rupert said, citing the outlook for US fiscal deficits and a more robust growth outlook. Rates climbed on Friday, with the benchmark 10-year Treasury note trading a point lower in price to yield 3.33 percent, up from 3.21 percent late Thursday.
US investment-grade bond issuance totalled nearly $18 billion so far this week, which tied as the fourth-biggest deal week in 2010, according to IFR, a Thomson Reuters service. The 10-year yield was pushed to a six-month peak of 3.33 percent this week as investors liquidated positions due to concern about the fiscal outlook after an announcement of a deal between President Barack Obama and Republican lawmakers to extend federal tax cuts and renew unemployment benefits.
This week's yield spike also kindled worries of rising mortgage rates and other consumer borrowing costs, which are referenced against Treasury yields. "Given the path of least resistance, Treasuries will be coming under some further pressure," said Kevin Flanagan, chief fixed income strategist with Morgan Stanley Smith Barney in Purchase, New York.
Flanagan expects the 10-year yield to trade in a wide range of 2.50 to 3.50 percent over the next six months, with intermittent safe-haven rallies stemming from ongoing concerns over the fiscal problems in Europe. "Long-term out, I won't be long Treasuries here," he said.
The rise in yields seems to be costing the US central bank itself some money. If the Fed's performance with the first purchases of Treasuries under its recent quantitative easing program, on November 12, is any guide, it may have accumulated upward of $1 billion or more in paper losses on its Treasury purchases so far.
Data released by the Fed on Friday showed that on November 12 it bought 16 different bonds for more than $7.2 billion. An analysis by Reuters Insider of what the Fed paid versus what the bonds trade for now shows an average decline in price of about 2.9 percent, with losses on individual bonds ranging from just over 2.0 percent to over 4.0 percent. The estimated paper loss on the day is about $200 million. The New York Fed on Friday said the Fed will purchase about $105 billion of Treasury and Treasury inflation-protected securities in 18 operations from December 13 through January 11.