NEW YORK: Treasuries yields rose slightly on Friday, pausing a week-long rally, as investors rethought expectations for next week's highly anticipated European Central Bank meeting.
Comments by ECB President Mario Draghi last Friday were interpreted by some market participants as indicating that the central bank had changed its forecast on inflation lower, and that it may be more likely to embark on new quantitative easing to stave off a decline.
But others say that such a move is unlikely and market gauges that central banks watch, such as five-year, five-year forward breakeven inflation rates, still indicate inflation to be near the ECB's 2 percent target in the future.
Treasuries have rallied as German government bonds plunged to record low yields, and are likely to continue following European bonds next week, with a risk that disappointment after the ECB meeting could send yields higher.
"If the market rallied in Europe because he was going to do it does the backend in Europe sell-off hard because he hasn't done it?," said Richard Gilhooly, an interest rate strategist at TD Securities in New York.
"Even if he doesn't do anything next week he's still going to talk about what they will do, and get the market bulled up on that," Gilhooly added.
ECB expectations also fell on Friday after German Finance Minister Wolfgang Schaeuble warned that the central bank has run out of tools to fight deflation, and that liquidity in markets may be too high.
The ECB meeting and geopolitical concerns including tensions in Ukraine are likely to remain the market's focus next week even as next Friday's US employment report for August comes into view.
Benchmark 10-year Treasuries were last down 2/32 in price to yield 2.35 percent, up from 2.33 percent late on Thursday.
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