Treasuries prices fell on Friday as investors unwound positions heading into the slow year-end period, with very low trading volumes exaggerating price moves. Bonds briefly pared losses after data showed consumer spending was tepid in November, before declining further on an improvement in US home sales.
For the most part, though, selling was motivated by investors reducing the average maturity of their holdings and their overall positions for the year-end, traders said. "I think it's mainly just account positions, they came out of the supply of the last two weeks a little longer duration than they anticipated and they need to lighten up a bit," said Anthony Cronin, a Treasuries trader at Societe Generale in New York.
The Treasury sold $177 billion in new coupon debt over a week-and-a-half period. The sales included three-, 10- and 30-year securities last week and two-, five- and seven-year debt this week. "Any moves are exaggerated in trading environments like this," Cronin added.
US government bonds have been one of the best performing asset classes in 2011, returning 9 percent, the ninth best performance of 64 asset classes and one of only 27 to post positive returns for the year, according to Credit Suisse. The safe haven demand for the bonds as European debt concerns spread and fears over global contagion from the region's crisis was key to the performance of the bonds, analysts said.
US debt returns edged out those of German bunds, which made 9 percent, but lagged those of UK, Australian, Swedish and Canadian government debt. US inflation-linked bonds returned 14.6 percent for the year, the fourth best performance and trailing only UK government bonds, US inflation-linked bonds and coffee.
Analysts see the debt's performance next year as likely to continue to be driven by European headlines, and whether or not the European Central Bank's liquidity offerings seep through to bond purchases that ease pressure on peripheral sovereign debt spreads.
"The main driver in the first quarter will continue to be ECB policy," said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott in Philadelphia. Treasury yields will likely continue to be supported by European headlines while a new quantitative easing program in the United States may also steepen the yield curve, said LeBas.