U.S. benchmark Treasury yields fell on Friday as an Italian bond auction disappointed market expectations, a day after data cast doubts on the resilience of the U.S. economic recovery.
Ten-year U.S. Treasury bond yields fell 2 basis points to 1.91 percent, along with a drop in German yields. U.S. Treasury futures hit a session high of 131-15/64 after the auction, as German Bund futures rallied.
Italy sold 4.75 billion euros of government bonds on Friday. Yields fell and the auction was covered but analysts said it had not gone as well as some in the market had hoped after Spain raised twice as much targeted at its successful bond sale on Thursday.
Benchmark Treasury yields have been stuck in a 1.8-2.1 percent range as investors balance signs of improvement in the world's largest economy with ongoing risks in the euro zone, Nick Stamenkovic, bond strategist at RIA Capital Markets said.
Until we either see a decisive improvement towards Europe or we see signs that the recent recovery in the U.S. economy is short-lived, then I don't see us breaking out of this range in the short term, he added.
Optimism on the U.S. economy was tempered by data on Thursday which showed U.S. retail sales rose at the weakest pace in seven months in December and first-time claims for jobless benefits moved higher last week.
We've had a good two months of better data, but the risk is that it's seasonal, that coming into Christmas, guys spend a bit more, a trader said. Treasury yields remained low even as the data improved. Now the risk is that ... Treasury yields will be vindicated.
As long as there are risks in the euro zone, there is likely to be underlying demand for safe-haven U.S. Treasuries, market players say. A few auctions showing an improvement in the take up of Italian and Spanish bonds was not enough to restore investor confidence in those countries' ability fund themselves over the long-term.
What we have seen so far is just a drop in the ocean compared to the size of issuance to come in the first quarter, particularly for Italy, Stamenkovic added.
Five-year U.S. Treasury yields were 1.4 bps lower at 0.82 percent and thirty-year bond yields shed 1.9 bps to 2.95 percent.