Yields on US Treasuries debt edged down from three-month highs on Friday as price cuts and higher yields built in during the first half of August attracted some buyers. But yields remained near three-month highs as improved economic data has damped expectations that the Federal Reserve will announce a third round of quantitative easing in September. Some believe the US central bank will await further data on the economy.
At the same time, worries over Europe's debt crisis have calmed somewhat over recent weeks, easing demand for safe-haven debt. "The flight-to-quality buying that drove yields down has diminished, which let yields rise quite a bit over the past few weeks, and traders and investors have taken more interest in Treasuries at these higher yields," said Gary Thayer, chief macro strategist at Wells Fargo Advisors in St. Louis, Missouri.
In addition, "the market's expectations are not quite as high for quantitative easing as they were a couple of weeks ago when the economic data looked softer than it does now," he said. Treasuries did not react to data on Friday showing US consumer sentiment improved in early August. A gauge of future US economic activity improved in July, but still pointed to sluggish growth ahead.
Despite the dramatic sell-off over the past month, some see Treasuries as likely to remain well bid, because of their appeal as one of the safest investments available. "The lack of safe collateral hasn't changed," said Lou Brien, market strategist at DRW Trading in Chicago. "We'll fluctuate up and down, but I don't think we've seen the end of the bond market (rally) by any stretch."
Traders said thin volume as many traders take summer vacations has exacerbated moves in Treasuries price and yields. Mortgage servicers adjusting the Treasuries they hold as hedges in their portfolios may have also added to the recent sell-off, they said.
The next focus for the markets will be Fed Chairman Ben Bernanke's highly anticipated speech at the central bank's annual conference in Jackson Hole, Wyoming, at the end of this month. Investors will be watching for any hints about the central bank's plans for its next policy meeting, in September. "People still anticipate there could be something in Bernanke's Jackson Hole talk even if expectations for more monetary easing have diminished somewhat," Thayer said.
Another key event will be the European Central Bank's September meeting. Investors are expecting the ECB to outline steps, including bond purchases, that it will take to stem the spreading debt crisis in the euro zone. Benchmark 10-year note yields on Friday traded at 1.82 percent, up from a record low 1.38 percent on July 25. The notes have tested resistance at around 1.86 percent in recent days, just below their 200-day moving average, as foreign investors sold bonds in overnight sessions.