US Bond Yields Rise as Consumer Sentiment Improves

Junk or Jewels? The Lowdown on High-Yield Bonds
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U.S. Treasurys prices fell on Friday after data showed a brighter outlook from U.S. consumers, though yields held under key support levels at 10-month highs.

Bonds could see a bid in coming weeks as budget talks in Washington dominate trading and bring fiscal policy into focus.

The Thomson Reuters/University of Michigan's consumer sentiment index rose to 76.3 from 73.8 in January, topping economists' forecasts of 74.8.

"The number was stronger than expected and consistent with a U.S. economy that continues to grow,'' said Eric Stein, portfolio manager at Eaton Vance in Boston. That said, "the recovery is not booming by any stretch of the imagination."

Benchmark 10-year notes were last down 5/32 in price to yield 2.018 percent. The 30-year bond was last 13/32 lower at 3.187 percent.

The notes have tested support at yields of around 2.03 percent to 2.06 percent over the past few days but failed to break higher, which could set them up for further weakness.

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The next milestone for the market will be negotiations in Washington over the automatic budget cuts that are scheduled to come into effect on March 1. If the cuts do come to fruition, they could drag on the economy.

Even so, Jim Sarni, managing principal of Payden & Rygel, expects there will be a resolution to the budget cuts, much like last year's fiscal cliff fears, which fell by the wayside when policymakers came to an 11th hour deal.

"I think we will muddle through those just as we did the fiscal cliff,'' he said.

A new $9 billion sale of 30-year Treasury inflation-protected Securities (TIPS) next Thursday will also be closely watched, after months of strong demand for inflation-linked bonds.

The auction risks being weak because the debt is offering a record low coupon of around 0.58 percent, based on Friday's levels, and as consumer price data will be released earlier the same day.

"CPI coming the same day as the auction adds one more element of uncertainty to the TIPS set up. I think it will make it harder," said Aaron Kohli, an interest rate strategist at BNP Paribas in New York.

Investors wanting to roll existing holdings into the new issues may also choose to wait for larger auctions of the bonds in the coming months, Kohli said.

Markets also were focused on a meeting in Moscow of financial officials from the Group of 20 nations on Friday that is expected to be dominated by the debate over exchange rates.

At issue is whether the loose monetary and fiscal policies of the United States, Japan, Britain and the euro zone amount to strategies of "competitive devaluation'' or currency manipulations intended to boost exports and growth.