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Bond Report: Treasury rally pauses Friday but government debt books second straight weekly yield decline

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Yields for long-dated U.S. government debt rose Friday for the first time in five sessions, as a rally that took the 10-year and 30-year Treasurys to yield lows not seen since February took a breather.

How Treasurys are performing
  • The 10-year Treasury note
    TMUBMUSD10Y,
    1.359%

    was yielding 1.354%, versus 1,287% at 3 p.m. Eastern Time on Thursday. Yields for debt rise as prices fall.
  • The 30-year Treasury rate
    TMUBMUSD30Y,
    1.991%

    was at 1.979%, compared with 1.910% a day ago.
  • The 2-year Treasury note yields
    TMUBMUSD02Y,
    0.216%

    0.215%, versus 0.192% Thursday.

The weekly stats

The 2-year was down 2.3 basis points this week, the 10-year gave up 8 basis points on the week, while the 30-year bond shed 6.9 basis points. The 2-year, 10-year and 30-year Treasurys all notched a second straight weekly decline.

Fixed-income drivers

Friday’s pullback chipped away at what has mostly been a steady, two-week drumbeat lower for U.S. government debt yields.

Sliding U.S. Treasury yields accelerated in the holiday-shortened week of trading, spooking equity investors briefly, due to the belief that the downtrend reflected concerns that economic growth may be peaking.

The 10-year Treasury yield hit a low of around 1.25% on Thursday, testing its 200-day moving average at 1.256%, FactSet data show, before the buying momentum tapered, pushing yields higher.

Falling yields have been blamed for rattling the bullish investor outlook for stocks and the economy, with the spread of the delta variant of coronavirus, now the dominant strain in the U.S., according to the Centers for Disease Control and Prevention, hamstringing business recovery in parts of the world.

Weaker-than-expected U.S. economic data, including the Institute for Supply Management’s purchasing managers survey for the services sector, which fell to a still high 60.1% in June from a record 64% in May, has been seen as evidence of peaking growth.

Elsewhere, China’s factory-gate prices rose at a slightly slower pace in June, raising hopes among economists that inflation in the world’s second-largest economy may have hit a turning point, the Wall Street Journal reported.

Meanwhile, new bank loans in China rose more than expected in June, and the country’s central bank also announced a new cut in the cash banks must hold in reserve, the reserve requirement ratio, or RRR. The move is viewed as a sign that China is combating slowing growth.

In U.S. economic data, inventories at U.S. wholesalers rose 1.3% in May, exceeding forecasts for 1%, as businesses rushed to keep up with a flood of demand for their goods and services.

What strategists are saying

The decline in yields this week has come amid a pause in U.S.. Treasury auctions of new debt, even as appetite has seemingly picked up.

Sebastien Galy, says that the next test for Treasurys will be the 10-year Treasury auction on Monday, “to see if yields increase and the auction tails or is well bid.”

“The move of a few basis points higher in the 10s yield correlating with a rebound [in] equity is likely just some profit taking. If the demand for bonds was driven by risk management as a hedge against equity and an inherent instability driven by a duality in the bond market regarding long-term growth, then we will need a string of better economic data to break out of this bearish growth equilibrium in US Treasuries,” the analyst wrote.

“The feedback loop of higher oil prices, end of federal unemployment insurance, and the spread of the Covid-19 delta variant where vaccination is low suggests this may take a while,” he wrote.

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