US Treasuries rose on Friday as falling stocks and European debt fears spurred a safe-haven rally that is likely to bleed over into next week. The benchmark 10-year yield moved below 3 percent again on Friday as stocks closed out a six-week slide. Next week's heavy calendar of US economic data could extend the downward move in yields if the worsening trend growth is confirmed.
--- Investors eschew risk amid economic gloom
--- Fed announces final round of QE2 purchases
"We are at the mercy of stocks," said Chris Rupkey, managing director and chief financial economist at Bank of Tokyo/Mitsubishi UFJ. "When stocks move down, bond prices move higher and people get stopped out. When stocks move up, bond prices weaken and yields move up." The benchmark 10-year yield stood at 2.98 percent in late trade, slightly below 2.99 percent a week ago, and about 70 basis points below its level in early April.
The announcement of the swan song purchases in the Federal Reserve's $600 billion second phase of quantitative easing underscored the imminent end of the US central bank's role as a contributor of stimulus to the economy. Weaker trade data from China, the scrapping of a planned large IPO by Ally Financial and ongoing disputes about a second bailout for debt-stricken Greece also hurt investor sentiment.
But with the state of the US economy investors' main concern, data on producer and consumer prices, housing starts, jobless claims, manufacturing, and retail sales will get a lot of attention from investors in the coming week, traders said. US stocks will also take their cue from Europe's attempts to finalise its aid package for Greece, Rupkey said. The euro and US stocks slipped in tandem late this week on worry the Greek bailout will not come to fruition and views that European growth may also be cooling, he said.
"The global economies continue to cool, the US economic data is deteriorating, and Bernanke has made it clear that continued accommodation is needed," said Scott Graham, head of government bond trading at BMO Capital Markets in Chicago.
Federal Reserve Chairman Ben Bernanke said on Tuesday the recovery was fragile enough to warrant keeping in place the extraordinary support the Fed has already provided.
But some investors said the recent spate of disappointing data might not be the final chapter in the economic story. For risk investors, it has definitely been a "sell in May and go away," said Ray Humphrey, senior vice president and senior portfolio manager at Hartford Investment Management Co, with $159.6 billion in assets under management.
Stocks, corporate bonds, and the high-yield market have all suffered as a consequence, he said. Humphrey argued, however, that production, particularly evident in the auto sector, was hurt by disrupted supply lines from Japan and that the economic data could begin to brighten by late July or early August.
"The weaker data we have now reflects where we were, but not where we are today," he said. The end of the Fed's quantitative easing purchases and the push for fiscal austerity in Washington will not help the economy," Humphrey said. But if the economy does perk up midway through the third quarter, investors will have to decide whether that growth can percolate in the fourth quarter as well.
"We could see a temporary rise in growth in the third quarter and then a reversion back to a slower growth rate in the fourth," he said. Two-year Treasury notes> rose 2/32 in price to yield 0.41 percent, down from 0.43 percent late on Thursday, while 30-year bonds rose 21/32, their yields easing to 4.18 percent from 4.23 percent.
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