Treasuries Extend Yesterday's Rally Amid Fed-Inspired Uncertainty

(RTTNews) - Extending the rally seen late in the previous session, treasuries showed another strong move to the upside during trading on Friday.

After seeing initial strength, bond prices continued to move steadily higher as the day progressed. As a result, the yield on the benchmark ten-year note, which moves opposite of its price, tumbled 8.7 basis points to 2.13 percent.

With the drop, the ten-year yield added to the 8.6 basis point loss posted on Thursday, pulling back further off Wednesday's nearly two-month closing high.

Treasuries continued to benefit from the reaction to yesterday's Federal Reserve decision to leave interest rates unchanged, which pointed to continued uncertainty for at least the next month.

The central bank is still widely expected to raise rates before the end of the year, suggesting an interest rate hike in October or December.

Paul Ashworth, Chief U.S. Economist at Capital Economics, said, "As far as our own forecasts are concerned, we now expect the fed funds rate to end this year at between 0.25% and 0.50% (i.e. just one 25bp hike)."

"But it is not implausible that some other 'risk' will emerge over the next few months (the debt ceiling is the most obvious candidate) that will convince the Fed to delay even longer," he added.

The Fed's comments indicating that recent global economic and financial developments may restrain economic activity somewhat also increased the appeal of safe havens such as bonds.

On the U.S. economic front, the Conference Board released a report showing a slightly smaller than expected increase by its index of leading economic indicators.

The Conference Board said its leading economic index inched up by 0.1 percent in August, while revised data showed no change in July. Economists had expected the index to rise by 0.2 percent.

"The U.S. LEI suggests economic growth will remain moderate into the New Year, with little reason to expect growth to pick up substantially," said Ataman Ozyildirim, Director of Business Cycles and Growth Research at the Conference Board.

Economic data may move back into the spotlight next week, with traders likely to keep an eye on reports on new and existing home sales and durable goods orders.

Trading could also be impacted by reaction to comments by Fed Chair Janet Yellen, who is due to deliver a speech on inflation dynamics and monetary policy Thursday evening.

Additionally, the Treasury Department is due to auction $26 billion worth of two-year notes next Tuesday, $35 billion worth of five-year notes next Wednesday and $29 billion worth of seven-year notes next Thursday.