US government debt prices gained on Friday as investors were cautious that Greece could fail to form a government in Sunday's elections, while weak US economic data was also seen increasing pressure on the Federal Reserve to launch new bond purchases.
Investors are braced for possible market turmoil in case Greece fails to form a government, or if a victory by the leftist SYRIZA party is seen increasing the chances of the country exiting the Euro zone. At the same time, disappointing data on Friday showed a worsening economy that increases the chance that the Fed will announce an extension of its Operation Twist program, or launch a new quantitative easing program, when it meets next week.
"There are a lot of concerns going into the weekend with the Greek election," said Justin Hoogendoorn, fixed income strategist at BMO Capital Markets in Chicago. If Greece forms a government and investors are assured that the country's exit from the euro zone is unlikely, bonds may give back price gains on Monday.
"Ultimately can they form a government it would be "risk on" with rates lower and yields higher," said Ira Jersey, interest rate strategist at Credit Suisse in New York. Even with this outcome, however, there are a number of other risks in the euro zone that could regain investors' attention and bonds could again get a safety bid on fears that Spain's bank bailout plan won't be enough to address problems plaguing the country.
Adding to the bids for bonds on Friday was a spate of disappointing US economic data, which reinforced the view that US growth is slowing for a third consecutive spring as the euro zone debt crisis drags on the global economy. US factory production fell 0.4 percent in May, contracting for the second time in three months, the Federal Reserve reported, while the Thomson Reuters/University of Michigan survey showed American consumer sentiment weakened to its lowest level in six months in early June.
The data increases pressure on the Fed to announce new bond purchases at next week's meeting, though analysts are mixed as to the most likely course of action. Credit Suisse's Jersey sees a new Operation Twist program as having higher odds, noting that inflation and inflation expectations remain relatively solid, and that the Fed is unlikely to expand its balance sheet with new net purchases unless there is a much sharper economic contraction.
Operation Twist, which involves buying long-term debt and funding the purchases with sales of short-term notes, is scheduled to expire at the end of June. The Fed has only around $200 billion in three-month to three-year debt left on its balance sheet that it can sell in a new program. Benchmark 10-year Treasury notes rose 17/32 in price to 101-21/32 with a yield of 1.59 percent, down 5 basis points from late on Thursday. Thirty-year bonds gained a point in price to yield 2.69 percent, down from 2.74 percent.