Auctions of $123 billion in U.S. securities will draw traders' focus in the U.S. government securities market next week and could push U.S. Treasury yields higher.
The slope of the Treasury yield curve steepened in the week just ended, a week of volatile trading, observed Ward McCarthy, chief financial economist and managing director in the fixed-income division of Jefferies & Co. in New York.
With supply on the horizon, a distinct lack of market liquidity and real money accounts still looking to lighten positions into year-end, rates appear to be headed higher in the weeks immediately ahead, he said.
The Treasury will sell $29 billion in three-month bills and $28 billion in six-month bills on Monday. It will sell $32 billion in three-year notes on Tuesday and $21 billion and $13 billion in re-opened 10- and 30-year securities, on Wednesday and Thursday, respectively.
At the same time the shadow cast by a weaker-than-forecast November U.S. employment report should make any upward move in rates a modest one, they said.
Benchmark U.S. 10-year yields hovered above 3 percent on Friday and seemed destined to do so in the weeks to come.
In the next one month or several months you'll see the 10-year yield hover around the 3 percent level, said James Sarni, senior portfolio manager at Los Angeles-based Payden & Rygel, with $55 billion in assets under management.
One support for U.S. Treasuries prices - the debt problems of some nations on Europe's geographic periphery - could weaken next week if European Central Bank (ECB) bond purchases meaningfully ease liquidity constraints. That would mean less fuel for a safe-haven bid for U.S. Treasuries.
The 30-year bond fell at the end of the week and will generally have an uphill battle going forward, analysts said.
This is a longer-term phenomenon; there's less sponsorship for the long end, than in the belly of the curve where the Fed is in play and continues to be in play, Sarni said.
In contrast, there are no sponsors for the 30-year, he said. You don't have the Fed in there and you have the concern about inflation in the long-term.
Sarni said buyers have shown some interest when the 30-year yields more than 4 percent.
But certainly with a 3-handle, there was very little interest, he said.