Treasuries outlook: prices gain after selloff, track foreign bonds

US Treasury prices edged higher on Friday, as investors bought back bonds after a selloff earlier in the week spurred by robust US inflation data that fed the view that the Federal Reserve may hike interest rates more aggressively than expected. US benchmark 10-year yields, which move inversely to prices, had jumped to four-year highs this week, while yields on 2-year notes touched more than nine-year peaks.
Yields briefly ticked higher after data showed stronger-than-expected housing starts and import prices, suggesting inflation was on the rise and the economy on a stable growth path. But there was not enough support for the price move. "The bond market was oversold from Wednesday's CPI-related selling and that may be nearing an end soon," said Tom di Galoma, managing director at Seaport Global in New York.
Wednesday's data showed that the core consumer price index grew 0.3 percent, the biggest increase since January 2017. That was followed by stronger-than-expected US producer prices data. Both reports led to a spike in yields. Analysts said the market has increasingly priced in four rate hikes by the Fed this year.
Treasury yields on Friday also tracked a decline overseas. Yields were also down on German, UK and Japanese government bonds. "Healthy and surprising bond purchases in Europe today prevented Treasuries from selling off on a morning full of better economic reports," said Jim Vogel, interest rates strategist, at FTN Financial in Memphis, Tennessee. "Constant global selling this month was one reason for woeful US Treasury performance so domestic traders welcomed the chance for a break."
Analysts further attributed the drop in JGBS yields to news Bank of Japan Governor Haruhito Kuroda had been re-appointed for another term, while Masazumi Wakatabe, an advocate of aggressive easing, was appointed BoJ deputy governor. Their appointments suggest there could a few more years of monetary stimulus in Japan, analysts said. In late trading, US benchmark 10-year Treasury note yields fell to 2.873 percent, from Thursday's 2.893 percent. US 30-year yields dropped to 3.130 percent, from 3.145 percent late on Thursday.
The yield curve also flattened on Friday, suggesting more conviction for a near-term interest rate hike. The spread between US 2-year and 10-year notes declined to 65.9 basis points, the tightest in two weeks. The curve steepened last week during the stock market sell-off, as inflation fears escalated with the 2.9 percent rise in wage gains for January. That prompted a sell-off on the long end of the curve.