U.S. Treasurys Rise, Setting Third Straight Weekly Gain

Chicago (Jan 17)  Treasurys on Friday brushed off hints of U.S. economic progress, as prices rose out of losses and helped the market set three consecutive weeks of gains.

Yields, which move inversely to prices, slipped toward their lowest levels of the new year as buyers supported a market that got battered through much of 2013. By late afternoon, benchmark 10-year notes gained 7/32 in price to yield 2.819%, according to Tradeweb. The 30-year bond rose 13/32 to yield 3.75%.

The market has now posted gains for three straight weeks, fueled by renewed investor interest at the start of a new year as well as last Friday's weak employment report that cast doubts about strength in the U.S. economy. The 10-year yield started the year just above 3%.

"People are trying to pick up the pieces after the disappointing [nonfarm payrolls report], trying to find other clues as to the status of the economy," said Dan Mulholland, head of U.S. Treasury trading at BNY Mellon Capital Markets.

Friday's batch of economic reports didn't offer much direction. While a reading on consumer sentiment for early January unexpectedly fell, signals on the housing, production and labor fronts remained encouraging.

An annualized 999,000 new homes broke ground last month, suggesting continued demand for houses despite higher mortgage rates. The December industrial production report showed factories churning at a healthy rate into year-end, while a labor report showed a slight pickup in hiring and jobs openings in November.

These reports did little to alter expectations about the future of the Federal Reserve's stimulus plan. Investors broadly believe the Fed will continue on a gradual tapering path by reducing bond purchases by $10 billion at each of its upcoming policy meetings. That would end the program by fall this year.

The Fed's policy-setting board meets next on January 28-29. In December, the central bank kicked off the long-awaited tapering with a $10 billion reduction, lowering the monthly purchase pace to $75 billion.

"Choppy economic data creates an increase in volatility and helps cement a methodical approach to tapering," said Sean Simko, fixed-income portfolio manager at SEI Investments. "Near term, little inflation pressures will cap the 10-year at 3%, while mixed data will create a temporary bid in the market."

Like Mr. Simko, bond investors seem to be paying more attention to the lack of inflation in the economy. Because even as the unemployment rate continues to decline, consumer and producer price reports released in the past week showed muted inflationary pressure and levels still far short of the Fed's 2% long-term target.

Without a pickup in inflation, the central bank might be compelled to keep its policy accommodative, which would support Treasurys.

Friday afternoon, Richmond Fed President Jeffrey Lacker noted although he believes inflation will move up toward 2% over the next year or two, it is a factor the Fed is watching closely.

So even though bond strategists at many big banks expect the 10-year yield to end the year at 3.5% to 3.75%, questions about the strength of the recovery and persistently low inflation are keeping bond buyers around.

Bond traders warn that with so many bets piling up against the Treasurys market last year, the start of any buying can set off larger gains.

"I see a Treasury market that remains underloved and underowned," said William O'Donnell, rates strategist at RBS Securities. He notes that the 10-year yield has been brought down from 3% a number of times as buyers continue to hover around that mark.