US Treasury debt prices rose for a third day on Friday with support from worries over Europe's debt crisis and the Federal Reserve's pledge this week to keep interest rates near zero through late 2014. Treasuries also got a lift from Friday's data on gross domestic product, which showed slower-than-expected US growth in the fourth quarter of last year and some forecasts of anaemic growth early this year.
Investors were reminded of the precarious nature of Europe's debt situation on Friday afternoon, when Fitch Ratings downgraded the sovereign credit ratings for Belgium, Cyprus, Italy, Slovenia and Spain, indicating there is a 1-in-2 chance of further downgrades in the next two years.
"The ratings thing is already baked in at this point - it is really more of a question of when and if Greece is going to default, and the contagion effect not only to the rest of the euro zone but the rest of the world," said Mary Ann Hurley, vice president of fixed-income trading at D.A. Davidson & Co in Seattle.
The benchmark 10-year US Treasury note rose 13/32 in price to yield 1.90 percent, down from 1.94 percent late Thursday, while the 30-year bond climbed 21/32 higher in price to yield 3.07 percent, down from Thursday's close of 3.10 percent. The five-year Treasury note's yield dropped to 0.74 percent, marking the lowest since at least the 1960s.
Data released on Friday showed the US economy grew at its fastest pace in 1-1/2 years in the fourth quarter, but a strong rebuilding of inventories by businesses and weak spending on capital goods hinted at slower growth in early 2012. "The GDP print wasn't exactly very inspiring," said Gennadiy Goldberg, interest-rate strategist at 4Cast, Inc, adding, "a lot more of growth came from inventory building than the market had expected. It was not a positive factor for risk at this point."
The report also indicated that growth might not continue even at its current slow pace in the quarters to come. "Personal consumption is not gaining momentum and the methods the consumer has used to keep the momentum going over the last few quarters is - we hope - expected to fade," said Tom Porcelli, chief US economist at RBC Capital Markets in New York. "It has mainly been savings and credit usage, and when you're going through a deleveraging process, that is not a good thing to see."
Indeed, New York Fed President William Dudley said on Friday the pace of the US recovery remains "sluggish" and is likely to slow somewhat this year. Hurley of D.A. Davidson said "there is the expectation that while we have seen a boost to the economy in the fourth quarter, that is not going to last. And let's face it, historically speaking, fourth-quarter growth was not really that great for an economy that is supposedly in recovery."
Treasury debt prices were underpinned this week by the Fed's statement on Wednesday it was likely to hold interest rates near zero through late 2014. The central bank also left the door open to further buying of Treasuries and mortgage-backed securities to prop up the economy.
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