Prices of US government debt fell on Friday, ending the worst quarter for Treasuries since the final quarter of 2010, but some strategists said the stage could be set for steady or even lower yields in coming quarters. An afternoon sell-off reversed early gains scored in response to economic data that challenged the view that US growth was accelerating and reinforced the perception that the Federal Reserve could undertake further measures to stimulate the economy and job growth.
Such views are a key to an outlook for only a limited rise in Treasury yields - if one occurs at all - from the levels in place at the end of the quarter just ended. Strong economic data would undoubtedly push interest rates higher, but questions about growth in China and the euro zone are tied to the outlook for the US economy. How such questions are answered will determine investors' tolerance for risk and, conversely, their appetite for safe-haven US government debt.
"Since the end of 2011, we've seen the market get spooked by stronger economic data; those concerns were elevated at the Fed's last policy meeting when the market was unable to glean any hint the Fed would continue their aggressive open market operations in the second half of the year," said Robert Tipp, chief investment strategist for Prudential Fixed Income, with $240 billion in assets under management.
The Fed's $400 billion "Operation Twist" has helped support long-dated Treasuries prices as the US central bank has been selling shorter maturities and buying longer-dated issues in the open market to curb mortgage rates and long-term borrowing costs in an effort to stimulate borrowing and investment.
Improved economic data and the potential waning demand from the Fed for large amounts of Treasuries, with a period of quiet in the euro zone debt crisis, caused Treasury yields to rise in the first quarter, Tipp said. The week just ended, however, could hint at the market's next trend. Instead of rising, the benchmark 10-year Treasury yield eased to 2.22 percent from 2.24 percent a week ago.
"The past quarter saw a run-up in yields, but we don't anticipate a repeat of that for the second or third quarter because we are hitting the peak political season both in France and in the United States," said Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds Management in Menomonee Falls, Wisconsin, with approximately $220 billion in assets under management.
In late trade, the benchmark 10-year Treasury note was down 16/32 in price, its yield rising to 2.22 percent, breaking above its 200-day moving average in the 2.17-2.20 percent area. The 10-year yield rose 35 basis points for the quarter, its biggest three-month increase since the last quarter of 2010 when yields jumped 78 basis points. It briefly touched a 4-1/2-month high last week at just under 2.40 percent.
The 30-year bond was down 1-12/32 in price for a 3.35 percent yield, up 8 basis points from late Thursday. For the quarter, the 30-year yield was poised to increase 46 basis points, the largest three-month rise since the fourth quarter of 2010, when it jumped 65 basis points.