US Treasury debt prices slipped on Friday for a second day as recent flight-to-safety buying subsided and dealers anticipated further Federal Reserve interest rate tightening. Recent buying in Treasuries tied to downgrades of General Motors and Ford debt and possible losses in hedge funds has slowed after Wednesday's benign reading on US inflation and subsequent equities rally. The 10-year Treasury note slipped 3/32 in price for a yield of 4.12 percent, up from 4.11 percent late on Thursday and lows of 4.05 percent on Wednesday. The next target is near 4.14 percent. Two-year notes, which more closely track prospects for Fed action, ended at a yield of 3.67 percent, up from 3.63 percent on Thursday and 3.59 percent a week ago.
Fed Chairman Alan Greenspan, in a speech about the energy market on Friday, reaffirmed his view that oil inventories are likely to keep rising.
As energy prices retreat it will remove a brake on the US economy, potentially boosting growth and almost guaranteeing more rate hikes from the Fed, dealers said.
"The only thing slowing the central bank down may be the concern that its actions would aggravate the struggles of the US automakers or cause a rupture in some hedge fund positions," said Adolfo Laurenti, economist at LaSalle Bank.
Deferred Eurodollar futures dropped to a six-session low and traded below support at a confluence of the 10-day, 20-day and 30-day moving averages.
The projected year-end fed funds rate rose to 3.77 percent from 3.73 percent on Thursday but still underestimates the level of Fed tightening many dealers expect this year.
"Four percent remains the level of Fed funds that we believe the Fed will view as neutral. There are five FOMC meetings remaining this year. If the Fed tightens at four of those five by 25 basis points, fed funds will end the year at 4 percent," said Brian Robinson, senior bond strategist at 4CAST Ltd.
The day's sluggish trading was tied partly to expiration of Chicago Board of Trade June options, which kept 30-year bond and 10-year note futures anchored within a few ticks of the nearest strike price.
Rolling into September futures positions from June is also in full swing.
Five-year Treasury notes slipped 3/32 at a yield of 3.87 percent, up from 3.84 percent. The 30-year bond rose 3/32 to yield 4.43 percent, down from 4.44 percent.
Prospects for more Fed hikes coupled with a moderating inflation outlook encouraged curve flattening trades. The two-year/10-year yield spread ended at 45 basis points, with 38 bps the next target.
The next major economic data for bonds will be minutes from the May 3 Federal Open Market Committee meeting, due on Tuesday, and then the May personal income report on Friday.
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