NEW YORK (Reuters) - U.S. Treasury debt traders expect the direction of prices in the market on Friday to be determined first and foremost by oil markets as the turmoil in Libya and parts of the Mideast threatens supply.
Despite assurances from the White House and the Organization of Petroleum Exporting Countries that disruptions in oil exports from Libya could be balanced by drawing from other sources, oil has jumped this week amid fears that supplies might run short.
Violent anti-government demonstrations have gripped Libya for over a week, with clashes between militias loyal to embattled Libyan leader Muammar Gaddafi erupting near Tripoli.
The unrest pushed oil prices to near $120 a barrel before they retreated late on Thursday, but have been high enough to spark worries among Treasury investors that the U.S. economic recovery could be stunted.
“We’re still watching oil and stocks,” said David Coard, head of fixed-income sales and trading at Williams Capital Group in New York.
Trading in Treasuries on Friday will also hinge on any new developments in the political crisis in the key oil-exporting region.
“The situation over there is going to continue to overhang the market and pretty much everything else takes a backseat,” said Marty Mitchell, chief market technician at Stifel Nicolaus in Baltimore.
For now, the flight-to-quality trade in Treasuries is based more on anxiety than on real evidence that oil is hurting the U.S. economy.
Investors expect high oil prices to push up the cost of other materials, such as plastics as well as energy, thereby denting manufacturing activity and dampening consumer spending.
But oil would have to stay high for longer than a few days to have a major impact.
“To the extent that oil does stay above $100 for a couple-week period, I think would get a lot of notice,” Mitchell said.
Also on Friday, a Federal Reserve purchasing operation in the Treasury market along with revised fourth-quarter GDP figures, set to be released in the morning, will offer a few distractions from the situation in the Middle East.
“We have month-end on Monday so we’ll probably see some squaring up (Friday) afternoon,” Mitchell added.
Editing by Gary Crosse