US Treasury prices stage relief rally

US government bond prices staged a relief rally on Friday, cheered by benign data on core inflation and weak consumer sentiment, which reduced prospects of an interest rate increase from the Federal Reserve.
US government bonds, which have been hammered by concerns about inflation and fears of rising interest rates globally, also got a reprieve from unexpectedly soft data on industrial output and capacity utilisation.
Benchmark 10-year Treasury note yields pulled further back from five-year peaks hit on Wednesday, but still recorded their sixth straight weekly rise after a rout that pushed bond yields across the board above 5 percent last week for the first time since July 2006.
"It's almost a bit of a relief rally. The markets had started to price in the fear that inflation was getting out of control and that a Fed rate hike was a possibility," said Bill Schultz, chief investment officer at McQueen, Ball & Associates in Bethlehem, Pennsylvania.
"Right now, we are back in the camp that believes there is nothing for the Fed to do," he said. Ten-year Treasury notes jumped 18/32 in price, pushing yields down to a session trough of 5.15 percent compared with 5.23 percent late on Thursday. The yield, which moves inversely to price, jumped as high as 5.33 percent on Wednesday, its highest level in five years.
Analysts saw scope for Treasuries to sustain the recovery, citing an ebb in selling by investors exposed to mortgage securities, adjusting their portfolios after yields rose above 5 percent.
"Most of the mortgage stuff has already gone through and I don't think we have to worry much about that right now," said Beth Malloy, bond market analyst at Briefing.com in Chicago. "There is a good chance, not for a quick pop higher, but you will be able to push prices up in an orderly fashion to better levels," she said.
The market was unmoved by comments from San Francisco Federal Reserve President Janet Yellen that the recent rise in long-term rates had not been nearly enough to resolve what former Fed Chairman Alan Greenspan called "the bond rate conundrum" because there were not strong economic reasons for the phenomenon. Yields on most maturities remain below the Fed's 5.25 percent target for overnight money.
Government data showed the annual core inflation rate fell to 2.2 percent in May, marking a retreat toward the Fed's comfort zone of 1 to 2 percent and coming below market forecasts of 2.3 percent.
The 30-year long bond traded up 27/32 in price, lowering yields to 5.25 percent, compared to 5.31 percent late Thursday. Two-year notes, the most sensitive to changing monetary policy views, rose 5/32 to yield 5.02 percent from 5.10 percent late on Thursday.
"We expect the 10-year note to fluctuate within a 4.90-5.30 percent range over the next few months, expecting the long end to regain further ground over the week ahead," said Cyril Beuzi, head of interest rate strategy at BNP Paribas in London.
Bonds were also bolstered by an unexpectedly steep fall in consumer sentiment, measured by the Reuters/University of Michigan Surveys of Consumers. US interest rate swaps spreads were mixed. Spreads on the front-end were wider, while the longer-dated maturities narrowed.