NEW YORK: Intermediate-dated US Treasuries rose in price on Thursday after European Central Bank president Jean-Claude Trichet said that the decision to raise benchmark interest rates would not necessarily be the first in a series.
Treasuries also were lent safe-haven support after news of a strong earthquake in Japan, where a tsunami warning was issued. The tsunami warning for the northeast coast of Japan was later lifted, NHK public television reported.
The ECB raised rates by a quarter of a percentage point to 1.25 percent, the first increase since the financial crisis in 2008, but Trichet said a series of hikes is not necessarily in the cards.
"Trichet's comments led the market to believe that a further rate hike was not completely on the table, or at least he did not indicate that this is the first in a string of many (rate increases)," said Marty Mitchell, chief market technician at Stifel Nicolaus in Baltimore.
Longer-dated Treasuries had sold off early in the day heading into the Treasury's announcement of the sizes of next week's debt auctions, then pared some of those losses after the Treasury said it would sell $66 billion of three-year notes, reopened 10-year notes and reopened 30-year bonds, which was as expected.
"The curve flattened into the two-year, five-year and seven-year auctions two weeks ago and now we are starting to steepen into next week's supply, which includes tens and thirties," Mitchell said.
Thirty-year Treasury bonds last traded 6/32 lower in price to yield 4.61 percent, and the Treasury curve steepened, with the gap between two-year note yields and 30-year bond yields moving out to 380 basis points, marking its widest since March 21, from 376 basis points on Wednesday.
Benchmark 10-year note yields last traded at 3.55 percent, unchanged from Wednesday, after earlier testing support in a band from around 3.56 percent to 3.60 percent.
Analysts say a significant break above these levels could mean a further leg of weakening for the debt.
"If you don't hold around these areas we will probably go to 3.75 percent-to-3.80 percent fairly quickly," said James Combias, head of government bond trading at Mizuho Securities in New York. "The issue is whether we are going to go into a much higher yield range environment or if this is going to be the bottom of the range," he added.
Five-year notes were trading 4/32 higher in price to yield 2.29 percent, down from 2.32 percent late on Wednesday, while seven-year notes rose 3/32 to yield 2.97 percent from 2.99 percent.
Meanwhile, fears over the impact of a possible government shutdown are seen weighing on Treasury debt. House Speaker John Boehner said on Thursday talks with the White House over a spending bill for this year are drifting further apart and that substantive policy issues remain to be resolved.
Analysts at JPMorgan said a shutdown would likely be negative for Treasuries, as it would illustrate the problems members of Congress have in compromising. This may be potentially a bigger issue if they are unable to resolve 2012 budget differences.
"Because the Republicans have linked the 2012 budget to the debt ceiling, this week's brinkmanship now seems likely to be repeated in May and June when the failure to raise the debt ceiling could trigger a technical default in Treasuries," JPMorgan said.
Foreign investors sold Treasuries when the government shut down in 1995, after being buyers of the debt for the rest of the year. Treasuries also significantly underperformed other markets at that time, JPMorgan said.
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