Treasurys Extend Gains Slightly After US Economic Data

 By Cynthia Lin 
    Of DOW JONES NEWSWIRES

NEW YORK (Dow Jones)–Treasury prices inched higher early Thursday in New York even though the U.S. reported slightly smaller than expected weekly jobless claims and August trade deficit.

Jobless claims unexpectedly fell by 1,000, instead of rising 4,000 in the latest week, while the trade deficit shrank to $45.61 billion.

In recent trading, 30-year bonds are up 25/32 in price to yield 3.174%. The benchmark 10-year note also rose in price, as yields dip more than five basis points to 2.185%. Bond prices more inversely to their yields.

For now, the Treasurys market seems to be licking its wounds from six straight days of selling–one of the longest and sharpest losing streaks this year. While investors shed their safer assets as they pared back expectations for a U.S. recession, the economic landscape at home and across the Atlantic is still far from the clear, and analysts say the underlying bid for Treasurys remains.

“The Treasury market is currently in the grip of a correction from deeply overbought levels,” said RBS’s fixed income strategists, but recommend investors “be very patient on the sidelines and look to reload on [long-dated Treasurys] when we have signs that the overbought correction has run its course.”

Economic data have offered a less dismal outlook on the U.S. economy of late, which, coupled with hopes about a euro-zone resolution, has helped diminish investors’ appetite for financial refuge.

The selloff began early last week when euro-zone authorities made a concerted effort to let market participants know that their priority is to shield their region’s banking system from the potential Greek default. Since then, yields have bounced to their highest levels in weeks, with the 10-year yield up more than 40 basis points.

Still, the week of selling has only made a dent in this year’s dramatic rise in Treasurys, which started early April when fears of a U.S. recession and Greek default reared their ugly heads.

Wednesday’s surprisingly tepid 10-year note auction underscored this waning demand for the safety of U.S. government bonds, especially when yields are still low by historical standards. Analysts at Stone & McCarthy called the sale “ugly,” with the weakest bid metric since last November. The Treasury was also forced to pay a yield of 2.271%. This was not only higher than expected, but it also failed to attract strong foreign buying.

That doesn’t bode well for this afternoon’s $13 billion 30-year bond auction, the last of the Treasury Department’s round of sales this week.

By Cynthia Lin, Dow Jones Newswires; 212-416-4403;

cynthia.lin@dowjones.com

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