Treasuries rally pauses

US Treasury debt prices were steady to lower on Friday with mild profit-taking from a six-week rally that has sent yields to six-month lows and looks set to keep running. Investors have turned increasingly bullish on US government debt as weakening economic data points to sluggish growth, tepid inflation and the likelihood monetary tightening is still a long way off.
The trend marks a shift from a week ago, when many investors were underweight, or short, Treasuries, betting the rally that has sent benchmark 10-year note yields more than 50 basis points lower in the past six weeks was overdone. "The market is pretty bulled up," said Charles Comiskey, head of Treasury trading at Bank of Nova Scotia in New York. "I don't see the scenario changing a lot unless we start getting bad news on inflation."
Ten-year note yields have fallen 8 basis points this week, trading as low as 3.05 percent on Thursday, which was the lowest since December 7, when they last traded below 3 percent. The benchmark notes on Friday traded 3/32 lower in price to yield 3.07 percent, up slightly from 3.06 percent late on Thursday.
As investors continue to adjust to a slower growth outlook, yields are likely to continue to fall. Slower growth will mean lower volatility, a flatter Treasury yield curve and 10-year yields below 3 percent, said Comiskey. May's payroll employment report next Friday will be closely watched, though bonds are likely to remain well bid even if the report meets or exceeds expectations, said Dominic Konstam, head of interest rate strategy at Deutsche Bank in New York.
Konstam views the notes as fairly valued between 2.75 percent and 3.25 percent. Data on Friday also confirmed a weakening economic trend, with US consumer spending rising less than expected in April as high gasoline prices continued to squeeze household budgets. It also showed annual inflation at its fastest pace in a year.
Another report on Friday showed pending sales of existing US homes dropped far more than expected in April, to a seven-month low. Meanwhile, the cost of insuring Treasuries in the credit default swap market held firm on Friday at around 51 basis points, or $51,000 per year to insure $10 million in debt for five years.
The bond market is scheduled to close early on Friday, ahead of the US Memorial Day holiday on Monday. Two-year Treasury notes on Friday traded unchanged in price to yield 0.49 percent, while 30-year bonds were 9/32 lower in price to yield 4.24 percent from 4.23 percent late on Thursday.