Higher yields may be a near-term trend

By Chris Reese

NEW YORK (BestGrowthStock) – U.S. Treasuries fell in price on Friday, capping off a week of relatively aggressive selling spurred by rising growth outlooks and deficit worries, and which may have bonds on track for even higher yields.

Bond dealers also sold Treasuries to lock in yields on the corporate bonds they will underwrite next week, while investors reduced bond holdings after government data on prices and trade suggested stronger-than-expected economic growth in the fourth quarter and easing deflation risk.

Friday’s selling had benchmark Treasury yields on track for the biggest one-week rise so far this year, and that could set the tone for Treasuries trade in the near term, said Kim Rupert, managing director of global fixed income analysis at Action Economics in San Francisco.

“Yields are going to remain biased higher, but not in a straight line,” Rupert said, citing the rising deficit and inflation fears and a more robust growth outlook.

Rates climbed on Friday, with the benchmark 10-year note trading 14/32 lower in price to yield 3.26 percent, up from 3.21 percent late Thursday.

“It seems like we have rate-lock selling ahead of next week’s (corporate) supply. It tends to be very aggressive,” said Brian Edmonds, head of rates trading at Cantor Fitzgerald in New York.

U.S. investment-grade bond issuance totaled nearly $18 billion so far this week, which tied as the fourth-biggest deal week in 2010, according to IFR, a Thomson Reuters service.

“We also have some traders long coming out of Thursday’s (30-year bonds) auction and they were trying to unload their positions ahead of the weekend,” Edmonds said.

The 10-year yield recorded a six-month peak of 3.33 percent this week as investors liquidated positions due to inflation and deficit fears in response to an announcement of a deal between President Barack Obama and Republican lawmakers to extend federal tax cuts.

This week’s yield spike also kindled worries of rising mortgage rates and other consumer borrowing costs, which are referenced against Treasury yields.

Outside of the price and trade data, Treasuries were also lent a bearish tone by a stronger-than-expected rise in consumer sentiment in December in the Thomson Reuters/University of Michigan survey.

“It adds to a growing number of economic indicators that are looking better than expected,” said Pierre Ellis, senior global economist at Decision Economics Inc. in New York.

The Federal Reserve will announce at 2 p.m. EST (1900 GMT) its next schedule of Treasury purchases tied to its $600 billion quantitative easing program, dubbed QE2, and reinvestment of proceeds from maturing mortgage securities.

(Additional reporting by Richard Leong; Editing by James Dalgleish)

Higher yields may be a near-term trend