US Treasuries prices rose on Friday, helped by expectations of further monetary accommodation at a Federal Reserve policy meeting next week. Sustaining the recent trend, long-dated bonds outperformed shorter ones. Traders believe the Fed will buy more long-dated maturities in coming months to keep 10-year yields low.
In contrast, short-term yields are already near zero, cemented there by the Fed's recent pledge to keep short rates exceptionally low until at least mid-2013. Bond investors began moving farther out on the yield curve when the Fed decided to nail the front end down where it was for two years, said Steve Van Order, fixed income strategist with Bethesda, Md.-based Calvert Investment Management Inc.
"Then came the weak August jobs data in early September and people decided the Fed would have to do something," he said. The popular idea that the Fed would sell short maturities and buy longer ones intensified the rally, Van Order said. The Fed's policy-setting committee will meet on Tuesday and Wednesday for what is expected to be a vigorous discussion on what, if anything, the central bank should do next.
While Treasuries did make headway, the gains were circumscribed by this week's gains in riskier assets like stocks and progress on eurozone debt issues. US stocks rose for a fifth straight day on Friday and the S&P 500 scored its best week since early July on actions taken to limit damage from a potential sovereign debt crisis.
A global central bank plan to provide three-month dollar loans to European financial firms relieved fears that major European banks might face a year-end liquidity squeeze. The European Central Bank said that in co-ordination with the Fed, the Bank of England, the Bank of Japan and the Swiss National Bank, it would hold three fixed-rate operations between October and December to offer banks as many dollars as needed to ease any funding year-end funding crunch.
"The big news this week was the arrangement for dollar liquidity through the Fed and the ECB jointly," said Robert Tipp, chief investment strategist for Prudential Fixed Income, with $240 billion in assets under management. "The market is starting to get the hang of the negotiating process and the Europeans are making progress in getting their arms around the situation," he said. "It's not a fast or perfect process, but things seem to be falling into place."
Traders said they were a little less worried on Friday that Greece's fiscal troubles would eventually bring down the European financial system. "There's a view that the global leaders are coming up with a plan for a soft landing on Greece," said Scott Graham, head of Treasury trading at BMO Capital Markets in Chicago.
US Treasury Secretary Timothy Geithner was in Poland on Friday, where he discussed with European finance ministers the possibility of leveraging the eurozone's bailout fund to give it more clout to tackle the region's debt problems. A source told Reuters the finance ministers had neither rejected nor endorsed leveraging their bailout fund.
At any rate, that possibility was not a market priority, Tipp said. "(Policy-makers) can look at ideas like leveraging the EFSF, but ultimately the market is looking to see if they're getting the basics done." The 30-year bond rose 24/32, its yield falling to 3.32 percent from 3.35 percent late on Thursday. Benchmark 10-year Treasury notes rose 8/32 in price, their yields easing to 2.05 percent from 2.08 percent at Thursday's close.