TOKYO Feb 8 U.S. Treasuries were little changed in holiday-thinned, Asian trade on Friday, keeping the benchmark 10-year yield near a three-week high hit the previous day after a weak 30-year auction prompted selling in longer-dated bonds.
The market took a breather after dismal demand at the 30-year offer triggered a jump in long-dated yields, stretching out the spread between two- and 10-year notes and steepening the yield curve. Climbing U.S. stocks had also added to selling pressure.
Market participants said that Asian trade had all but ground to a halt on Friday, as financial markets in China, Hong Kong, Taiwan, Singapore, Malaysia and Indonesia were closed for the Lunar New Year holidays.
Yasutoshi Nagai, chief economist for Daiwa Securities SMBC's economic research group, said investors had shed Treasuries even as a rate cut by the Bank of England on Thursday and emphasis by the European Central bank that the region's economy is slowing pointed to lower yields around the world.
A dismal reading of U.S. services sector data earlier in the week had added fuel to speculation of a possible recession, but Nagai said that did little to stop investors from selling bonds as they were aware that the latest flight-to-quality rally from the start of the year had pushed prices too high.
"Recent factors all warrant lower rates, but the market realises that bonds are just too expensive," Nagai said, adding that longer maturities were particularly weak as investors reckon that a flurry of Federal Reserve rate cuts may heighten inflation risks in the future.
Data a week ago showed that that 17,000 U.S. jobs were cut last month, marking the first labour market contraction in 4-½ years and raising fears of a recession, although a separate report showed a modest revival in manufacturing.
For more clues into how far the Fed will continue to cut rates, market participants awaited a speech by San Francisco Fed President Janet Yellen later in the day.
They also anticipated a meeting of Group of Seven finance officials in Tokyo on Saturday to see where the world's wealthiest nations stand on sagging economic growth and market turmoil.
Treasury futures TYv1 edged down 4/32 to 116-13/32.
The benchmark 10-year note US10YT=RR rose 7/32 in price to yield 3.743 percent, a touch lower than 3.764 percent late on Thursday. The yield jumped as high as 3.8125 percent in the previous session to hit its highest since mid-January.
The two-year yield US2YT=RR inched up 2/32 in price to yield 2.040 percent, down slightly from 2.077 percent in late New York trade.
As a result the two-year/10-year spread yawned to more than 170 basis points, its widest since September 2004 and further steepening the yield curve.
The spread has expanded by 100 basis points in just three months, as recent safe-haven buying pushed short-end yields lower than longer ones.
The 30-year yield US30YT=RR was little changed at 4.497 percent, near 4.563 percent touched on Thursday for the first time since late December after an auction in the maturity attracted weak demand from indirect bidders, which include foreign central banks.
Longer maturities have been more vulnerable to selling due to worries that inflation risks may loom in the future, given the Fed's aggressive rate-cutting campaign to help avoid a recession. The central bank slashed its main interest rate by 125 basis points last month to 3.0 percent.
"It's hard to say when the curve steepening will end," said Nagai at Daiwa Securities, adding that the trend would last at least until the Federal Reserve stops cutting rates.
A Reuters poll taken a week ago shows 17 Wall Street dealers unanimously expect the central bank to cut the fed funds rate again next month.
But Dallas Fed President Richard Fisher on Thursday said that the Fed is now "ahead of the curve" on interest rates and must carefully balance a desire to spur growth with the need to contain inflation.