US Treasury debt yields ended 2011 near all-time lows, as prices rallied on Friday in a shortened session and the last trading day of the year. Benchmark 10-year notes began the year trading well above 3 percent, and in September dipped to 1.67 percent to the lowest in at least 60 years.
"We started the year with a 10-year yield of 3.30 percent and a nearly unanimous view that interest rates had nowhere to go but up. It looks like we will close the year with a 10-year yield in the neighbourhood of 1.88 percent and, a nearly unanimous view that interest rates have nowhere to go but up," said Kevin Giddis, president of fixed income capital markets at Morgan Keegan in Memphis, Tennessee.
Giddis does not share the expectations for higher rates however, citing economic conditions in Europe, political dysfunction in Washington and a lack of US job creation for his expectation yields have further to fall. "For these reasons and others, count me among the Treasury market bulls for 2012," Giddis said in a note.
Despite their dizzying prices and paltry yields, Treasuries could be seen as a good investment in 2011. The Barclays Capital US Treasury index returned 9.66 percent year-to-date as of December 29, compared with a 7.72 percent return for Barclays' broader US Aggregate index.
Treasury traders spent Friday looking for ways to prepare for the coming week when, starting on Tuesday, Wall Street firms' year-end balance sheet limitations would be lifted, allowing traders to place new bets on the US economy, the European debt crisis and global growth, all factors affecting Treasury prices. Benchmark 10-year Treasury note yields were solidly under 2 percent and headed lower. The 10-year note will post its largest yearly price gain since 2008.
Friday was also month-end extension day, when money managers normally fine-tune the average maturity length of their portfolios so it matches benchmark fixed-income indexes. But for the first time, Wall Street is split on the benchmarks, with some indexes accounting for the Federal Reserve's actions in the market while others disregarded the effects of the Fed.
'Operation Twist,' a program in which the Fed is selling short-dated Treasuries into the market and buying longer-dated US debt, has caused a contraction in the overall duration of the Treasury market according to some calculations. Friday's trade appeared to favour the idea of an extension rather than a contraction in duration, with prices for 30-year bonds posting the most gains, while 10-year notes and seven-year notes followed close in second. "It's still fairly quiet, it's not taking a lot to move the market," said Adam Brown, co-head of Treasury trading at Barclays Capital in New York. "It's a normal month-end, year-end."
Joe Leary, a Treasury trader at Citigroup in New York, said he planned to set up some options in case of a selloff early next week. He said he was also buying cheapened, off-the-run Treasuries with longer maturities. What the new year will hold for Treasuries depends on whether the European sovereign debt crisis flares up again or conditions improve.
"We have news that French President Sarkozy is back on the plane or train to Berlin on January 9," said Chris Ahrens, interest-rate strategist at UBS Securities in Stamford, Connecticut. "We'll be wrestling with moderate to improving US economic growth with this backdrop of what's going on in Europe." Benchmark 10-year Treasury notes rose 6/32 in price for a yield of 1.88 percent, down from 1.90 percent at Thursday's close. Thirty-year Treasury bonds gained 10/32 in price to yield 2.89 percent, down from 2.91 percent late on Thursday.