Treasuries outlook: long-end rally pushes yields to two-month lows

US Treasury debt prices rose on Friday as safe-haven buying intensified and the Federal Reserve's presence in the Treasury market spurred some defensive positioning by Treasury traders later in the day. Fears that Europe's debt troubles were moving back into the spotlight drove some of the buying in Treasuries.
The president of the Federal Reserve Bank of New York, William Dudley, said on Friday that Europe's financial crisis posed a threat to US banks and the economy but it was up to the continent's leaders - not the Federal Reserve - to find a resolution.
As the day progressed, short-covering moves by traders who were surprised by the high prices the Fed had to pay at the first of its two purchasing operations on Friday accelerated the rally. Benchmark yields dipped to the lowest in over two months. The Fed bought $2.51 billion in 30-year Treasury bonds in a reverse auction for which dealers submitted a total of $4.56 billion for consideration.
"The prices the Fed had to pay were much higher than any I've seen before," said Rick Klingman, Treasury trader at BNP Paribas in New York. "It didn't seem like anybody had any good paper for sale," he added. "Some people got lifted a lot on things they didn't expect to get lifted on and they had to cover."
A tame inflation reading also cleared the way for a Treasury rally. The government reported US consumer prices were flat last month as Americans paid less for cars and gasoline, while the 12-month inflation reading fell for the second straight month. Benchmark 10-year Treasury notes were trading 16/32 higher in price to yield 1.85 percent, the lowest since October 5 and down from 1.91 percent late Thursday. The notes were on track for the best weekly performance in six weeks.
Thirty-year bonds were trading 1-8/32 higher to yield 2.86 percent from 2.91 percent. The search for safe-haven investments supported demand in Treasury auctions of $78 billion of debt this week. An additional $99 billion of two-, five- and seven-year notes will be sold next week.