By Ellie Ismailidou, MarketWatch
Treasury yields closed below 2% on Friday, after a week of much
fluctuation but light trading volumes, as liquidity dried up and
new supply hit the market.
Throughout the week, the market seemed to shrug off economic
data, rather driven by two main themes: the hangover from the
post-Fed buying rally that started last week and the shrinking
liquidity as auctions of two-, five- and seven-year Treasury notes
kept pushing new supply into the market.
The yield on the benchmark 10-year Treasury note dropped 6.1
basis points to 1.946% on Friday, after crossing over the 2%
threshold on Thursday and posting the largest two-day gain since
Feb. 17, according to Tradeweb. Overall it gained 1.4 basis points
throughout the week. Bond prices move inversely to yields.
The two-year note yield fell 3.9 basis points to 0.583%, and the
30-year bond yield declined seven basis points to 2.529%.
The main driving force in the market on Friday was as a report
that showed an updated reading on U.S. economic growth held steady
at 2.2% in the fourth quarter of 2014.
Investors had expected the growth rate
(http://www.marketwatch.com/story/4th-quarter-gdp-unchanged-at-22-exports-consumers-stronger-2015-03-27)to
be revised higher, so the unchanged reading gave a bullish
undertone to the market.
"This is a small rally that shouldn't come as a surprise, after
two down days in a row," said Chris Keith, portfolio manager at
Newton, Mass.-based Adviser Investments.
Wednesday's and Thursday's increase in yields reversed a
downward trend that started last week with a brisk rally after the
Federal Reserve indicated that it likely would raise rates at a
slower pace than expected.
Some investors are taking advantage of the higher yields hoping
to make gains; but the trend will likely not be sustained and
yields will resume their upward course, Keith said.
The lower trading volumes throughout the week have to do with
the fact that balance sheets around Wall Street have been very
carefully managed over the last couple of years and the
restrictions get tighter and tighter as more regulation comes into
play, explained Thomas Simons, an economist at Jefferies &
Co.
This intensifies the effect that cash coming into and out of the
Treasury market has on yields, he added.
Throughout the week the market took out a $90 billion package of
auctions with mixed results, as the two-year auction was well
received for the 10th straight month whereas both the five
(http://www.marketwatch.com/story/auction-of-5-year-treasurys-sees-lowest-demand-since-2009-2015-03-25)-
and seven-year
(http://www.marketwatch.com/story/seven-year-treasury-auction-sees-weak-demand-2015-03-26)
auctions saw weak demand, Simons said.
The weak demand on the five- and seven-year auctions put enough
pressure on prices in the secondary market to drive yields up on
Wednesday and Thursday.
At its core this is a liquidity issue, Keith argued.
The poor showing for the auctions also shows that investors
don't see the same value that they did previously in Treasury bonds
at these levels and at this time, Keith said.
"We all knew this rally would end and now that we are getting
closer to the end date investors are weary about going in," Keith
said.
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