Most US Treasuries prices rose on Tuesday as recent declines and higher yields drew buyers in choppy, pre-holiday trade. For the second day in a row, the US Federal Reserve executed two purchase operations as part of its $600 billion bond purchase program designed to help spur an economic recovery.
"We've reprised and yields have moved much higher, reflecting the swing from the view that growth was unacceptably low to a level of optimism on the economy that crested as the Fed launched their second purchase program," said Robert Tipp, chief investment strategist for Newark, New Jersey-based Prudential Fixed Income with $240 billion in assets under management.
Prices had risen early as traders positioned for Federal Reserve bond purchases and headlines about Europe's debt problems fed demand for safe-haven US government debt. In the morning, the Fed bought $7.79 billion in Treasuries with maturity dates ranging from June 30, 2016, to November 30, 2017. In the afternoon, the Fed bought $1.619 billion in Treasuries maturing from July 15, 2012, to February 15, 2040.
Benchmark 10-year notes rose 11/32 in price, their yields easing to 3.31 percent from 3.35 percent Monday. Thirty-year bonds rose 15/32 in price, their yields easing to 4.42 percent from 4.45 percent on Monday. Headlines in Europe might have contributed to the bid for Treasuries after Moody's Investors Service said it might cut its ratings on Portugal.
But year-end positioning and thin trading volumes ahead of the holidays were the most prominent features, traders said. Year-end demand for liquidity sustained the bid for shorter-term paper. Trading could be more volatile as volume dwindles before the holidays, traders said.
Some investment strategists believe the recovery the Fed is trying to promote by buying Treasuries is securely under way and poised for expansion in 2011, thanks to monetary and presumed fiscal stimulus. Based on that outlook, US Treasury yields could move higher next year. But other strategists think that even if US growth tops 3 percent next year, US Treasury yields might not rise much from current levels during that period.
"Following the sell-off we've seen in recent weeks, the market probably represents value at this point and there's a good chance that a year from now rates will not be a lot higher than they are right now," Tipp said. "We've had a big upswing in optimism about the economic outlook, but the fact remains that inflation is likely to stay low and the Fed is likely to keep interest rates near zero for some time," he said.
For the next week and a half, however, the market could still see a setback, Tipp said. "The market will remain vulnerable until we get through supply next week because liquidity is low," he said. "People will be reluctant to take big positions at this point in the year, especially given the volatility that we've seen.