Treasurys Fall Following Strong GDP Report
NEW YORK—Treasury prices fell Friday morning, led by shorter-dated maturities, after a government report showed the U.S. economy expanded in the last quarter of 2009 at the fastest pace since 2003.
The long end of the bond market suffered the least as its losses were curbed by technical flows, traders said. Many bond portfolio managers need to buy longer-dated Treasurys on the last day of the month to match the adjustment of the benchmark indexes.
The gross-domestic-product report, which showed growth at an annualized 5.7% clip last quarter, raised optimism on the pace of an economic recovery from the worst downturn since the 1930s, encouraging investors to buy riskier assets such as U.S. stocks while dimming the allure of low-risk and low-return U.S. government debt.
“We got a bit of strong data and some stability in the equity markets, so the flight-to-quality trade over the past few sessions has eased,” said James Combias, head of U.S. Treasury trading at Mizuho Securities USA Inc. in New York. But he cautioned that it is more important to focus on the GDP this quarter to see whether the pace of recovery can be sustained.
Mid-morning Friday, the price of the two-year Treasury note was down 3/32 to yield 0.907. The 10-year note was 7/32 lower to yield 3.670%. Prices and yields move inversely. The 30-year bond was down 8/32 to yield 4.568%.
The losses were tempered by the month-end buying. On the last trading day of each month, benchmark bond indexes add newly auctioned Treasurys to their index to replace retired maturities. Many bond-portfolio managers who measure their performance on the benchmarks need to buy longer-dated Treasurys to match that adjustment, known as month-end index extension buying.
The upbeat GDP data, which exceeded economists’ forecasts, raised speculation that the Federal Reserve will raise interest rates later this year to keep the risks of inflation in check. Fed Vice Chairman Donald Kohn said Friday that U.S. interest rates will have to rise as the economic recovery builds momentum, warning that many financial firms may not be prepared for the move.
On Wednesday, the Fed’s policy-making arm, the Federal Open Market Committee, left the fed-funds target rate at a record low. But its official statement was slightly more upbeat on the U.S. economy and confirmed plans the Fed will stop buying mortgage-backed securities in just over a month.
The two-year Treasury note, whose yield is the most sensitive to changes in official rate outlook, led Friday’s selling. The yield rose back above 0.9% again after dipping back below that level a day earlier amid worries about fiscal problems in Greece and several other euro-zone countries.
Treasurys started the selling overnight on talk that Greece will eventually be bailed out of its budget-deficit problem by other euro-zone members. European Commission President Jose Manuel Barroso told reporters in Brussels that “its’s quite clear that economic policies are not just a matter of national concern but European concern,” even though Germany and France both denied that they had any concrete plans for helping Greece.
As rumors and counter-rumors swirled through financial markets Friday morning, the spread between Greek and German bond yields fell.
The spread on 10-year Greek government bonds shrank slightly below 3.80 percentage points, after hitting a high around 4.05 percentage points Thursday.
Write to Min Zeng at min.zeng@dowjones.com
taken from:
