Treasuries slightly up

US Treasuries prices ended slightly higher on Thursday as buyers took advantage of earlier weakness as an opportunity to add bonds, though some analysts warned the market's six-week rally was near an end. US government debt yields rose to their highest in a week after data showed jobless claims fell more than expected. Other data showing weakness in home sales and regional factory activity tempered earlier losses.
The housing and manufacturing data was "a lot weaker than expected," said James Newman, head of Treasury and agency trading at Keefe, Bruyette and Woods in New York. "I think people looked at that as an opportunity to buy on a dip, and then we've bounced back a little bit." Weaker economic data has helped Treasuries in recent weeks as investors pare back expectations around the pace of growth, while a drop in oil prices has also tempered inflation expectations.
The size of the rally, however, now leaves bonds vulnerable to a correction if further data points to a still growing economy, even if growth is slower than some had expected. "I think this is a soft patch, but no more than that. I fully expect this to move the other way," said Eric Green, chief economist and head of rates strategy at TD Securities in New York.
Bearish technical patterns in benchmark 10-year notes and 10-year note futures also indicate the rally has neared its end, according to Bank of America technical strategist MacNeil Curry. "The bullish correction of the past month has completed and the larger bear is resuming," which will send 10-year note yields back to their February highs of 3.77 percent, Curry said in a note on Thursday. "Going forward price strength should now be sold."
Ten-year notes were last up 1/32 in price to yield 3.18 percent, after earlier rising as high as 3.24 percent. Yields have fallen from as high as 3.62 percent on April 8. The cost of buying credit default swap protection on Treasuries also rose three basis points on Thursday to 48 basis points, or $48,000 per year for five years to insure $10 million in debt. This was also up from 41 on Tuesday and its highest since April 19, according to data provider Markit. Most investors expect the end of the Fed's latest stimulus program next month to hurt stocks and bonds, according to the findings of a Reuters poll.
Volatility is also seen likely to tick up across markets. "Once the buybacks cease then I think we will definitely start going to higher yields," said Keefe's Newman. The Treasury also said on Thursday it will sell $99 billion in new two-year, five-year and seven-year notes next week, which is likely to pressure yields.
"I think we could still have another shot towards lower yields, but I don't think it's going to be anything that is sustained," Newman added. Inflation expectations as measured by Treasury Inflation-Protected Securities fell on Thursday as oil prices declined and the Treasury sold $11 billion in a 10-year reopening. Breakevens on ten-year Treasury Inflation-Protected Securities fell 3 basis points to 233 basis points and five-year breakevens fell 3 basis points to 216 basis points.