Treasuries rally

US Treasury debt prices rallied on Friday as the highest yields in nearly 10 months attracted buyers and the resignation of Egyptian President Hosni Mubarak helped lift longer-dated Treasuries. The safe-haven bid for short-term US government debt ebbed after Mubarak resigned on the 18th day of street demonstrations. On the other hand, a drop in crude oil prices was bullish for longer-term Treasuries since inflation erodes the value of fixed-income investments.
The yield curve flattened as short-term rates held steady while medium- and long-term yields eased. The difference between two-year and 10-year yields shrank to 280 basis points, the narrowest in more than a week. Traders said bargain-hunters were drawn in by 9-1/2 month highs on benchmark yields. Profits were also booked on trades placed on the view that inflation could push the Federal Reserve to raise interest rates by year-end.
"It's technical more than anything else. You (saw) some bargain-hunting and some short-covering," said Ken Hughes, senior market strategist at Lind-Waldock in Chicago. Although Treasury yields eased, Jeffrey Cleveland, senior economist at Los Angeles-based Payden & Rygel, said 10-year yields could move up to 4 percent this year.
"Last summer people were pessimistic about US growth and there was talk about more disinflation," Cleveland said. "Then the Fed began (its second phase of buying Treasuries) and now people feel more optimistic." Stronger consumer spending during the holiday season, 3.2 percent GDP growth in the fourth quarter and a recent drop in the unemployment rate have fed that brighter outlook, he said.
But the bond market already reflects a lot of optimism for the first half of 2011 and needs more good economic news if yields are going to move even higher, Cleveland noted. Conversely, what could push Treasuries prices higher and yields lower is the absence of meaningful job growth, he said.
Reports next week will shed some light on two key issues for bond investors: consumer spending and inflation. The January Consumer Price Index, due on Thursday, could also be a hot ticket. "A lot of people are getting nervous about inflation so that number will get a lot of scrutiny," Moran said. Ten-year notes last traded up 15/32 in price to yield 3.64 percent, down 6 basis points from Thursday, while two-year notes were flat, yielding 0.85 percent.
In the futures market, the March 30-year bond contract was up 29/32 at 118-13/32. It posted a 38.2 percent Fibonacci retracement of the intraday high of 121-26/32 on January 27 and the contract low of 116-26/32 two days earlier. On Friday, the Fed bought $7.38 billion of notes that will mature in six to seven years, the first of a $97 billion buying schedule it released on Thursday.