US bonds extend gains after Thursday's rally

U.S. Treasurys

Long-dated Treasurys prices rose on Friday as yield curve flattening trades unwound a small bit of the curve steepening that has occurred amid talk of the Federal Reserve cutting back on its bond-buying program.

The curve has shifted to its steepest level since 2011—with the gap between shorter-dated and longer-dated yields widening—amid persistent debate about when the Fed might trim its bond purchases, a program known as QE3 and intended to stimulate the economy by keeping long-term interest rates low.

Fed officials have said reductions in those purchases depend on what data show about the strength and sustainability of the economic recovery.

But if those cutbacks in purchases of longer-dated Treasurys were to occur, long-term rates would tend to rise.

At the same time the Fed has insisted that official short-term rates would remain low and some economists, those on the dovish side, believe the Fed could keep the federal funds rate near zero even to early 2016.

Cashin says: Eyeing the 10-year next week
Cashin says: Eyeing the 10-year next week

While shorter-term Treasurys posted narrow losses, anticipating next week's supply, benchmark 10-year Treasury notes rose 10/32, their yields easing to 2.753 percent.

The 30-year bond rose 28/32 in price, its yield easing to 3.839 percent.

On Friday, Atlanta Fed President Dennis Lockhart told CNBC the debate over reducing the pace of the Fed's massive bond buying program would be "on the table" at the Fed's next policy meeting December 17-18.

Recent polls by Reuters indicate a majority of economists and financial market analysts do not expect a "tapering" of the quantitative easing program to begin until the first quarter of next year.

In the CNBC interview, Lockhart said he believed the net impact of the Fed's asset purchases had been positive, and that "quite a bit of progress" had been made to help spur job growth and reduce unemployment. Lockhart is not a voting member of the FOMC in 2014.

Kansas City Fed President Esther George also said a tapering discussion would occur at the Fed's next meeting and seemed to characterize such conversations as routine.

"These are discussions we have at each meeting. So I would expect we will continue to discuss that as we go forward," she said, speaking on the sidelines of a conference in Paris.

CRT's Ader said the market seems to think the odds "have risen for a December announcement given the last non-farm payrolls report and the Fed's willingness to ease purchases."

The market is at least close to having discounted those higher odds, however, he added.

Technical factors were also supportive.

"Ten-year yields, for example, build up volume at the lower end of Thursday's trading range," Ader said.

John Briggs, managing director and head of cross asset strategy at RBS markets and international banking in Stamford, Connecticut, said the 10-year yield would range between 2.50 percent and 3 percent for the rest of the year. He recommended fading "range extremes as the market approaches those levels."

The Fed on Friday bought $1.57 billion in Treasurys maturing between May 15, 2038 and February 15, 2043 as part of its QE3 program.

—By Reuters