US Treasury prices rose on Friday, punctuating an April rally that lifted the market into positive territory for the year, as traders bet on slowing economic growth and the Federal Reserve sticking to a near-zero rate policy into 2012.
--- 10-year yield posts biggest 1-month drop in 8 months
Barclays' Treasury total return index was up 1.05 percent month-to-date through Thursday, bringing a year-to-date rise of 0.89 percent. It fell 0.16 percent in the first quarter. Investors stepped back into bonds in April, brushing aside for now concerns over the record US deficit, a looming debt ceiling and soaring oil and food prices.
The benchmark 10-year note's yield recorded its first monthly decline in eight months, while the two-year yield posted its biggest monthly drop since January 2010. Friday's trading was light and choppy, as primary dealers reduced the government supply they bought at this week's auctions, while investors bought bonds to match month-end changes to their portfolio benchmarks, traders said.
"We have a little bit of position squaring, but we don't see any real new interest or repositioning in the marketplace right now," said Tom Tucci, head of government bond trading at RBC Capital Markets in New York. Most investors took a breather after absorbing $99 billion of coupon-bearing debt. They also found solace in the Fed's pledge to leave interest rates near zero even as it plans to complete its $600 billion bond purchase program, known as QE2, at the end of June.
Several factors next week could slow the market's early spring bounce, analysts said. They include a renewed focus on the budget fight in Washington and typical caution ahead of the government's payroll report on Friday. "Next week Congress is back so we will start to see some more noise about the budget deficit, so that'll be interesting and have some impact on the market place, then we will move into payrolls on Friday. Those are the two things I think that next week will drive the market," RBC's Tucci said.
The US Treasury will announce details of its May quarterly refunding next Wednesday. Benchmark 10-year notes yields ended at 3.29 percent, down from 3.31 percent late Thursday. They broke through a series of chart resistance levels and are poised to test 3.20 percent, a level last seen in mid-March during a safe-haven rally days after a devastating earthquake hit Japan.
The yield on the 30-year bond slipped 2 basis points on the day to 4.39 percent, its lowest since March 16. On the month, it fell nearly 16 basis points, the biggest monthly drop since August 2010. Technical barriers might also restrain Treasuries in the near term, analysts and investors said. With 10-year yields near major resistance at 3.25 percent, RBS strategists recommended "reducing long exposure."
"It will be tough to surmount the resistance unless we get evidence that weak Q1 growth is the beginning of a trend, rather than a transitory blip," said William O'Donnell, head of US Treasury strategy at RBS Securities in Stamford, Connecticut. If economic growth accelerates meaningfully from the meagre 1.8 percent pace seen in the first quarter, investors will likely shift their focus back to inflation and the timing of when the Fed will raise interest rates to cool price pressures.
Even under these conditions, it will be tough for Treasury Inflation-Protected Securities to continue to outpace their nominal counterparts, some investors said. The Barclays TIPS index has risen 4.25 percent so far this year, four times more than its Treasury index's increase. "TIPS have had one heck of a run on the back of the QE2 success and inflation going up," said Krishna Memani, director of fixed income at OppenheimerFunds in New York. "For the next few quarters, nominal bonds will do better than TIPS."