Long-dated Treauries slip

Prices of long-dated US Treasury prices slipped on Monday, ending a two-day bounce. In contrast, year-end demand for liquidity sustained demand for shorter-term paper. Even among longer maturities, however, losses were slim, so the two-day bounce ended not with a bang, but with a whimper.
Selling emerged after the Federal Reserve bought Treasuries in two separate operations, both of them part of the Fed's plan to keep interest rates low and spur the economic recovery. "The bond rally from Thursday had come a long way - over 30 basis points - and this led many to take profits," said Chris Rupkey, chief financial economist at Bank of Tokyo/Mitsubishi UFJ in New York.
The benchmark 10-year notes slipped 1/32 in price, leaving its yield at 3.34 percent, while the 30-year bond shed 5/32, leaving its yield at 4.44 percent. At least some investment strategists believe the recovery the Fed is trying to promote by buying Treasuries is securely under way and poised for expansion in 2011, thanks to monetary and presumed fiscal stimulus.
"Looking to 2011, our leitmotif is 'recovery becomes expansion' as the value of real US and global GDP output exceeds the prior-cycle peak in 2007," said Morgan Stanley Smith Barney's investment committee. "Accordingly, we remain overweight equities, commodities, REITs and inflation-linked securities; market weight emerging market debt and managed futures; and underweight cash and bonds." On Monday, modest gains in the broad S&P stock market index seemed to weigh a bit on Treasuries prices.
"Bonds tracked fairly closely with stocks today," Rupkey observed. "Stocks and bond yields both hit their lows today shortly before Europe was going home at noon." Early in the session, Treasuries prices were said to benefit from the Fed's prospective bond purchases and safe-haven demand linked to Europe's debt problems and heightened tension on the Korean peninsula.
Before the Fed's purchases, "there was a squeeze higher" and sellers came in after the purchases, said John Spinello, chief fixed-income technical strategist at Jefferies & Co Many market participants believe higher Treasury yields will just be part of the natural order of events if the economy improves.
"After the fiscal stimulus we got from the payroll tax holiday, the ranges of yields are just naturally going to be higher than what we saw last year," said Michael Mata, co-manager of the ING Global Bond Fund in Atlanta, part of ING Investment Management, which had $515 billion in assets under management at the end of the third quarter. Mata said the recent US tax deal had raised growth expectations about 50 basis points over previous forecasts.
That extra growth should leave 10-year Treasury yields trading between 3 percent and 3.20 percent on one end of the range and between 3.75 and 4 percent at the other end sometime during the first half of next year, Mata said. The Fed bought nearly $8 billion in government debt maturing in eight to 10 years as part of its $600 billion program aimed to help the economy and $6.78 billion of Treasuries maturing between December 2014 and August 2020. Prior to the Fed's first bond purchase of the day, Treasury and other low-risk government debt climbed after South Korea conducted a military drill on Yeonpyeong, close to the maritime border off the west coast of the Korean peninsula.