US Treasury prices fell on Friday when a report showing consumer sentiment hit a four-year high in January prompted profit-taking after a week-long rally.
The University of Michigan's index of consumer sentiment rose to 103.2 in early January - its highest level since 2000 - from 92.6 in December, easily surpassing economists' forecasts for 94.0, as stocks rallied and job-seekers grew more confident of finding work as the economy recovers.
"Consumer sentiment made an extraordinary month-to-month gain and really sparked the selling," said Josh Stiles, senior bond strategist at IDEAglobal. "The market has come a long way and short-term speculators are taking some profits."
Analysts observed that bond yields are near the lowest part of a months-long trading range and that, too, fostered some wary selling before a three-day holiday weekend. The market will be closed on Monday in observance of Martin Luther King's birthday.
The improved consumer sentiment weighed on bond prices because it seemed to promise that consumer spending this spring would help fuel the economic recovery.
"After the huge amount of spending in the third quarter, consumer spending going forward had been a question mark," said Chris Rupkey, vice president and financial economist at Bank of Tokyo/Mitsubishi. "Now it looks as if in addition to inventory restocking by corporations fuelling growth, consumers could also pull their own weight. That's good for the economy."
With yields at their lowest in more than three months, aided by foreign central bank buying, and talk of a possible rate cut by the European Central Bank to curb the euro, the losses were moderate.
The market had gotten a boost earlier from surprisingly weak industrial data, as output rose just 0.1 percent in December. Analysts had forecast a 0.4 percent gain.
Yields on the benchmark 10-year Treasury have neared 3.90 percent for the first time since July, raising the possibility that a break lower could force further buying by managers of mortgage-backed securities portfolios. Another factor tending to curb selling in response to strong economic data are the Federal Reserve's regular assurances that in light of persistently low inflation, monetary policy can remain accommodative.
That point on policy was all but acknowledged by Richmond Fed President Alfred Broaddus in remarks on Friday.
"I think inflation will stay under wraps this year. I'll let you draw your own conclusions about what that may imply for our policy settings," Broaddus said, in one of the clearest hints yet that the Fed may not hike at all this year.
Analysts said the proximity of technical resistance levels probably inspired a little of Friday's selling.
"Technically the range is 3.91 percent to 4.66 percent and we're down on the bottom of the range here," Rupkey said.
The benchmark 10-year note fell 14/32, its yield at 4.03 percent, up from 3.97 percent on Thursday.
The 30-year bond was down 18/32 to yield 4.89 percent, versus 4.86 percent on Thursday.
The two-year note slipped 1/32 to yield 1.67 percent, versus 1.65 percent. Five-year notes fell 4/32 to yield to 3.03 percent, up from 2.97 percent.
Figures from the Federal Reserve showed foreign central banks bought a huge $14.9 billion of Treasuries in the week to Wednesday, largely reflecting intervention by the BOJ.
Foreign central banks now own a record $860 billion of Treasuries, or around a quarter of the market, leaving some analysts worried about what might happen if they slow or stop their purchases, let alone sell some of their holdings.
St. Louis Fed President William Poole on Friday said this flood of foreign capital was a sign of confidence in the US financial system.
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