US Treasury Outlook: set-up for next week's auctions may dominate

23 Jan, 2011

US government securities traders have little to do on Friday but set up for next week's Treasury note auctions, which could result in some flattening of the yield curve. If traders sell the short and medium part of the curve to make way for next week's Treasury issuance, yields could rise along that part of the maturity range, allowing the yield curve to flatten slightly, traders said.
The Treasury market is domiciled in its recent range, even after prices fell and yields rose on Thursday. That trade still left 10-year yields "within striking distance" of the 3.5 percent top of the range, in place since early December, said Ian Lyngen, senior government bond strategist at CRT Capital Group in Stamford Connecticut.
"Friday's session may prove something of a wild card with no data of note in the US," Lyngen said. The only meaningful event scheduled for the session is the Federal Reserve's purchases of coupons maturing from February 2018 to November 2020, Lyngen said.
Analysts estimated the Fed's purchases on Friday would total $8.25 billion. The purchases are constructive for Treasury prices, but rate-locking related to corporate issuance could weigh against Treasury prices, "leaving a directional bias elusive, to say the least," Lyngen said.
Looking farther out, US interest rates should grind higher as the year progresses, said James Barnes, senior fixed-income portfolio manager at National Penn Investors Trust Company in Reading, Pennsylvania, which has $9 billion in assets under management.
"The main reason for that will just be an economy that gradually gets better as the year goes on," Barnes said.
But even as US rates rise, the range will not be extraordinary, "unless we get overwhelming evidence of either a very strong economy or overwhelming evidence that we're nowhere near the expansionary phase of a recovery," he said. "You need to have real, solid data pointing one way or the other to break out of the range, and it has to be data specifically related to the domestic economy," Barnes said.
Recent data points to an improved economy ahead, but "we all are cognisant of some major obstacles out there that keep us from being more optimistic," he said. "It seems almost evenly split at this point, but we think the economy will very slowly get better and interest rates will just gradually go up as the year goes on, coinciding with the pace of the economic recovery," Barnes said.

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