US Treasuries prices ended lower on Friday as Greece appeared to be making progress towards restructuring its debt, dampening demand for safe haven US bonds, and before a holiday shortened week that will include $99 billion in new supply. The US Treasury is scheduled to sell $35 billion in two-year notes on Tuesday, $35 billion in five-year notes on Wednesday and $29 billion in seven-year notes on Thursday. The US bond market will be shut on Monday for the Presidents Day holiday.
European leaders expressed optimism on Friday that Greece would secure a new rescue package worth 130 billion euros ($171 billion) though policymakers admitted that urgent work was still needed to get its debt-cutting program back on track. "There's a growing sense Greece will ultimately get a deal," said Kevin Flanagan, executive director and fixed-income strategist at Morgan Stanley.
European finance ministers are due to meet on Monday, when they will discuss the second bailout agreement for Greece. "People are selling in advance of that," said John Canavan, a market analyst at Stone & McCarthy Research Associates. Breakevens on five-year Treasury Inflation-Protected Securities (TIPS), a measure of expected inflation, retraced an earlier gain to end lower on the day at 1.97 percent.
The rates initially rose after data showed that US gasoline prices jumped 0.9 percent in January, pushing overall consumer prices up by 0.2 percent and offering a reminder of the risks energy costs pose to the economic recovery. Shorter-dated notes risk coming under increasing pressure as the Federal Reserve plans to make additional sales of approximately $200 billion of the notes. The sales are part of its Operation Twist program, with proceeds going to buy longer term debt in a bid to lower mortgage borrowing costs.
Federal Reserve data released on Thursday show that primary dealers were net long a record $106.33 billion in Treasuries as of February 8, of which a record $65.23 billion is held in coupon debt maturing in three years or less. This may reduce the capacity of dealers to absorb the further sales.
Short-dated yields have been climbing in recent weeks in part because of the pressure of the Twist sales. Two-year note yields rose to 30 basis points on Friday, its highest level since October. The Fed next week will purchase as much as $4 billion in debt maturing between 2036 and 2042 and sell as much as $17.5 billion in short term Treasuries maturing between December 2012 and February 2015 as part of the programme.