US Treasuries hit by technical selling for 2nd day
By Wayne Cole
NEW YORK, Dec 17 (Reuters) - Treasuries prices were swept lower for a second straight session on Friday as technical selling from different pockets of the market overshadowed a moderate set of U.S. inflation numbers.
The benchmark 10-year note <US10YT=RR> lost 10/32 in price, lifting its yield to 4.23 percent from 4.19 percent late Thursday. Yields had got as low as 4.07 percent mid-week but many investors has since rushed to book profits, particularly on curve flattening trades.
The sell-off came in spite of an as-expected rise of 0.2 percent in both the consumer price index and the core index excluding food and energy.
This should have been a relief to the bond market after two months of upside surprises on inflation, but an initial bounce in Treasuries was quickly smothered by sellers.
"The data should tend to encourage views that the Fed is correct and that inflation looks to be contained," said Alan Ruskin, director of research at 4CAST.
"Net-net nothing here for the market to get excited at all, and the bond sell-off after the data does not look like it is allied to the numbers, but more of a continuation from yesterday, notably from mortgage selling," he added.
Some traders did note that annual growth in the core CPI rate ticked up to 2.2 percent from 2.0 percent, the highest reading since October 2002.
"I've heard people use this to explain the sell-off, but that's just an excuse. Clearly some people just wanted to sell," said one trader at a U.S. primary dealer. "The Fed is focused on the core PCE measure and that's still stuck at 1.5 percent."
The Federal Reserve's favored gauge of inflation is the core personal consumption expenditures index, or CPE, and that rose at an annual 1.5 percent pace in October, well within the central bank's comfort zone.
Such was cold comfort to bond bulls, however, as sellers took advantage of illiquid year-end conditions to dominate. The two-year note <US2YT=RR> eased 2/32 in price, taking its yield to 3.04 percent from 2.99 percent.
Five-year notes <US5YT=RR> fell 7/32, leaving yields at 3.62 percent from 3.57 percent. The 30-year bond <US30YT=RR> slid 18/32, yielding 4.86 percent, up from 4.82 percent.
The pressure on longer-dated debt reflected profit-taking on curve flattening trades. These involve borrowing short to buy longer-dated debt on a bet the latter will outperform in an environment of rising official interest rates but still subdued inflation expectations.
Such trades have been very popular, and profitable, in recent weeks and some unwinding was no surprise before year-end, said traders.
Across the Atlantic, euro debt had trouble of its own after after the influential Ifo survey of German business showed a surprise improvement. This followed strong surveys of regional U.S. manufacturing out this week and suggested global industry was proving more resilient than bond bulls had hoped.
On the other hand, investors have been shorting Treasuries to buy German bunds recently, partly in expectations of a falling dollar, and anything that hurts euro debt can be a short-term positive for Treasuries.
