NEW YORK: US Treasury debt prices rose on Thursday on safe-haven buying on the uprising in Libya and worries oil price rises could crimp consumer spending, harming the US economic recovery.
Early buying pushed the benchmark 10-year Treasury note yield to the lowest in three weeks, near technical price resistance at 3.40 percent. That overwhelmed any bearish impact from lower-than-expected weekly jobless claims.
The yield curve also continued to flatten, with the gap between yields on 10- and two-year notes compressing to its lowest in level this year, testing technical support at around 270 basis points. The gap has tightened from 273 basis points on Wednesday.
"The long end of the market for the last few days is making the assumption that oil prices are more of a tax on the consumer and an impediment to the economy than they are for long-term inflation," said Lou Brien, market strategist at DRW Trading Group in Chicago.
Benchmark 10-year notes were last up 10/32 in price to yield 3.45 percent, down from 3.48 percent on Wednesday.
Thirty-year bonds rose 23/32 to yield 4.54 percent, down from 4.58 percent and five-year notes increased 16/32 in price to yield 2.20 percent, down from 2.21 percent.
Break-evens on Treasury Inflation Protected Securities also continued their recent run-up on Thursday as investors hedged against the risks of rising inflation, with most of the activity in shorter-dated securities.
"It seems the market is pricing in the brunt of the inflation on the front end out to five years," said Gennadiy Goldberg, US fixed income analyst at 4Cast Ltd, in New York. "They are a little distrustful of the Fed in terms of how much they can control inflation up to five years, but after that they seem to be more trusting."
St. Louis Federal Reserve President James Bullard said the Federal Reserve should consider tapering off or scaling back its $600 billion bond purchase program, warning that too much stimulus may increase inflation more than intended. For details, see
Analysts at Bank of America Merrill Lynch said that trading patterns on Wednesday, when a morning rally was followed by a rapid sell-off in the afternoon, suggested investors were concerned about stagflation.
This is because almost all of the rally came from real yields, which are a measure of expected returns adjusted for inflation, while the sell-off came from break-even inflation, which measures anticipated inflation.
"A detailed scrutiny reveals that the move follows a stagflation concern," the BOA Merrill analysts said in a report.
Some analysts, however, see the risk of stagflation as unlikely, saying that companies will struggle to pass on the cost of rising commodities as consumers, hurt by higher oil prices, will have less income to spend.
"Consumers can't afford inflation now in the same way they could afford it in the '70s," said DRW's Brien. TIPS are rising because of concerns about higher oil prices, which will affect headline CPI, on which the securities are based, more than core CPI, he said.
Prices were little changed after the government sold $29 billion in seven-year notes at a high yield of 2.854 percent, with indirect bidders taking only slightly less than the auction average, at 49.7 percent.
The Federal Reserve bought $5.01 billion in notes due 2012 and 2013 on Thursday as part of its bond-buying program and will purchase an additional $6 billion to $8 billion in debt due 2018-21 on Friday.
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