US Treasury debt prices slipped on Thursday as data on jobless claims, manufacturing and home sales pointed to a faster-than-expected economic recovery, undermining the safe-haven appeal of government debt. Price losses were limited, however, due to year-end position squaring and some weakness in stocks, and trade volume was low going into the New Year's Day weekend, analysts said.
"The data is coming in better than expected, but the market is definitely on holiday trade. Stocks are down, and they should be reacting more positively to the positive data, so that is the thing I can attribute (a lack of strong price losses in Treasuries) to," said Mary Ann Hurley, vice president of fixed income trading at D.A. Davidson & Co in Seattle.
Initial claims for state unemployment benefits fell by more than expected to a seasonally adjusted 388,000, the lowest since early July 2008, the government said. Analysts polled by Reuters had forecast a reading of 415,000. But some market participants cautioned against taking the jobless data completely at face value due to the possibility of seasonal distortions.
"Overall, signs of an improving labour market but the year-end volatility of the series undermines its reliability and the (Treasuries) market is trading it that way - selling off only slightly, finding support, and firming back from the lows," Ian Lyngen, senior government bond strategist at CRT Capital Group in Stamford, Connecticut.
Traders also saw signs of economic improvement in the Institute for Supply Management-Chicago's business index, which jumped in December to the highest since July 1988, while pending homes sales for November rose by more than expected.
Benchmark 10-year Treasury notes were trading 12/32 lower in price to yield 3.40 percent, up from 3.36 percent late Wednesday, while the 30-year bond was 10/32 lower to yield 4.46 percent compared with 4.44 percent. Thursday is the last full trading day for Treasuries in 2010; European rates markets will be partially closed on Friday, and the New York Treasury trading session will end early.
Given the quiet nature of trade this week, some analysts said the outlook for the direction of Treasury yields remained cloudy heading into 2011. "The yield on the five-year and 10-year Treasury notes have risen by 60 basis points in the last 30 days and many are speaking about a rate rally in 2011," said Kevin Giddis, president of fixed income capital markets at Morgan Keegan in Memphis, Tennessee.
"Let me remind you that in 2007, 2008, and 2009, this very same argument took rates higher in January, then reality set in, and by May -in some years by March - rates were lower by an average of 30 basis points," he said, adding "to sum it up, rates are higher, the economy is, for the moment, showing signs of momentum, and the questions about inflation, growth, housing and jobs simply roll over into the new year."