Prices for longer-dated US Treasuries rose on Friday, retaking ground lost earlier in the week on concerns the Federal Reserve might soon slow its massive asset-purchase program meant to help prop up the economy. The curve this week shifted to its steepest since 2011, with the jump between shorter-dated yields and longer-dated yields rising, as investors saw the Fed possibly paring back its asset-purchase program as soon as this year.
The question of when the Fed might slow its $85 billion per month in purchases of Treasuries and mortgage-backed securities has become a key factor not just for US government debt but for a broad range of asset classes around the world. "It's a quick reversal from where we were Wednesday, (when) it steepened out nicely," said Justin Lederer, Treasury strategist at Cantor Fitzgerald in New York. Treasuries sold off sharply on Wednesday after Federal Reserve meeting minutes suggested the tapering process could begin at an upcoming meeting.
But Fed officials have underscored that any pullback decision depends on data about the health of the world's biggest economy. If the bank does pare its buying of longer-dated Treasuries, long-term rates would tend to rise. At the same time the Fed has insisted that official short-term rates would remain low, with some economists seeing the federal funds rate near zero even to early 2016.
"Therein lies the rub because what the Fed giveth to the front end, it taketh from the back," said David Ader, Treasury strategist at CRT Capital Group in Stamford, Connecticut. While shorter-term Treasuries posted small changes, anticipating next week's supply, benchmark 10-year Treasury notes rose 10/32 in price to yield 2.750 percent, compared to 2.784 percent late on Thursday.
The 30-year bond rose 27/32 in price to yield 3.836 percent, from 3.884 percent late on Thursday. On Friday, Atlanta Fed President Dennis Lockhart told CNBC the debate over reducing the pace of the Fed's massive bond-buying program would be "on the table" at the Fed's next policy meeting on December 17-18.
Lockhart said he believed the net impact of the Fed's asset purchases had been positive, and that "quite a bit of progress" had been made to help spur job growth and reduce unemployment. Lockhart is not a voting member of the policy-setting Federal Open Market Committee in 2014. Kansas City Fed President Esther George also said a tapering discussion would occur at the Fed's next meeting and seemed to characterise such conversations as routine.
Analysts said Treasuries could be rangebound next week, when the US Thanksgiving holiday will keep markets closed on Thursday. The Fed on Friday bought $1.57 billion in Treasuries maturing between May 15, 2038, and February 15, 2043, as part of its QE3 asset-purchase program. The Treasury will sell $32 billion in two-year notes, $35 billion in five-year notes and $29 billion in seven-year notes next week.