US Treasury prices climbed on Friday as bargain-hunting overshadowed supply worries after Thursday's sell-off on a disappointing bond auction and stronger-than-expected economic data. Lingering nervousness over Europe's fiscal problems and the turmoil in the municipal bond sector also helped lift Treasury prices, analysts said.
The Federal Reserve's purchase of $8.36 billion worth of bonds that will mature in seven to nine years also supported prices, analysts said. In November, the Fed reinstated a second round of asset purchases known as quantitative easing, or QE2, in an attempt to hold down borrowing costs and stimulate investment. This program is worth up to $600 billion and is expected to conclude mid-year.
Asian central banks led the bargain-hunting in overseas trading after longer-dated Treasury yields held technical support, with the 30-year touching 4.64 percent, its highest since late April. The market briefly lost its upward momentum, signalling some lack of conviction among investors, who may be more interested in stocks than bonds after strong earnings from General Electric and Google. In the cash market, 10-year Treasuries last traded up 7/32 in price, yielding 3.43 percent, down 2.5 basis points from late Thursday, while the 30-year bond was last up 11/32 for a yield of 4.59 percent, down from 4.61 percent at Thursday's close in New York.
The spread between two-year and 30-year yields grew to 398 basis points, 2 basis points short of its record wide. On Wall Street, major stock indices were up as much as 0.3 percent in late morning trading. Treasuries trading was choppy as dealers bought and sold bonds to hedge the supply of corporate bonds, which were estimated at $20 billion to $25 billion this week.
More government supply in the coming week also fuelled concerns over the unwieldy $1.3 trillion federal deficit after Thursday's weak $13 billion record auction of 10-year Treasury Inflation-Protected Securities. In the credit default swap market, the cost of insuring against a US debt default dipped after rising to its highest in about 11 months. The five-year cost to protect a US Treasury default was last quoted at 49.33 basis points, compared with 50.33 basis points on Thursday, according to Marki.