US government debt prices gave up some of their recent gains on Thursday as some investors saw recent price jumps as overdone and after stronger-than-expected economic data painted a more bearish picture for rates. US Treasuries may find new buyers on Friday as uncertainty over the extent of Japan's nuclear disaster is likely to make investors uncomfortable to be short the safe haven debt over the weekend.
As long as the situation in Japan remains uncertain and unrest persists in the Middle East and North Africa, rates will struggle to rise far. "The worst-case scenario possibilities are still out there," in Japan, said Jason Rogan, director of US Treasury trading at Guggenheim Capital Markets in New York. "Backups, for now, will be met with buyers."
Benchmark 10-year note yields on Thursday rose back above 3.25 percent, which is seen as a key technical level. It traded as low as 3.14 percent on Wednesday, the lowest since December 8. Renewed buying, however, could easily send the notes back below these yields, traders said.
James Newman, head of Treasury and agency trading at Keefe, Bruyette and Woods in New York, said 10-year note yields are likely to trade in a range between 3.20 percent and 3.35 percent. However, "if you get a real negative story over there, we will go flying through 3.20 percent," he said. "I'm not sure this is a technical trade as much as its an emotional trade about what's going on in Japan."
Newman added that bond selling by Japanese investors has not been seen, in spite of fears over repatriation that sent the yen to a record high against the dollar. Ten-year notes on Thursday were last down 26/32 in price to yield 3.25 percent, up from 3.16 percent late Wednesday.
Five-year notes fell 13/32 in price to yield 1.91 percent, down from 1.96 percent on Wednesday and 30-year bonds fell 1-13/32 in price to yield 4.43 percent, up from 4.38 percent. Inflation fears, meanwhile, climbed on Thursday as oil prices continued to rise and after consumer price inflation data showed the largest gain since June 2009. Breakevens on five-year Treasury Inflation-Protected Securities (TIPS) rose to 2.24 percent but are down from recent highs of 2.31 percent. The impact of Japan's devastation is likely to be inflationary, analysts at Morgan Stanley said in a report on Thursday. Tipsbreakevens are likely to continue to trade directionally with fluctuations in risk appetite, they said.