TREASURIES-Long end of the curve outperforms after taper news

Fri Dec 20, 2013 10:34am EST

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By Ellen Freilich

NEW YORK, Dec 20 (Reuters) - Longer-dated Treasuries rose in price on Friday as yields near the upper end of their recent range drew buyers and as the market adjusted to the idea that the Federal Reserve would begin to trim its bond purchases at the start of the new year.

The final debt auctions of the week occurred on Thursday, relieving some of the downward pressure on prices.

"We see a slightly better buying bias as the backup in yields heretofore and the curve's performance - while understandable in light of the (Fed) and supply stress - has been pretty sharp and is near extremes," said David Ader, Treasury strategist at CRT Capital Group in Stamford, Connecticut.

"The spread between three- and 10-year yields, for instance, is over 160 basis points, the steepest in over two years," Ader said.

Long-dated Treasuries outperformed shorter maturities on Friday as investors looked to take advantage of the recent rise in yields further out the curve.

"When you get to levels like this, buyers are certainly going to step in," said Paul Montaquila, vice president and fixed-income investment officer at Bank of the West's capital markets division in San Francisco. "The sentiment seems to be that rates are going higher, but gradually, not by leaps and bounds. So you will get buyers at certain levels and this seems to be one of those levels."

Heading into the holiday season, a lack of liquidity also contributed to some market choppiness.

"We're at levels that for now are exaggerated due to liquidity supply and all that," Ader said. "We're really talking about day trading. Note that Japan is out Monday for a holiday and so while we do expect buying interest from there in 2014, the next few days are a no-show."

News that the U.S. economy grew at its fastest pace in almost two years in the third quarter had minimal market impact.

Benchmark 10-year Treasury notes rose 5/32 in price, their yields falling to 2.913 percent. The 30-year bond price climbed 27/32, its yield easing to 3.858 percent.

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