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Treasuries End Volatile Day Flat

The GDP data wasn't as weak as first appears, traders say. Plus, housing remains strong.

Update from 11:33 a.m. EST

Treasuries seesawed all session but ended little change Friday as traders wrestled with higher inflation expectations and readied or a full week of market-bending data and events, including Alan Greenspan's final

Federal Open Market Committee


The benchmark 10-year ended the day little changed at 99 28/32 to yield 4.51%, down from 4.52% late Thursday. The yield fell as low as 4.48% and ran up as high 4.54% after reports on fourth-quarter GDP and new home sales for December hit the market.

The 30-year bond recovered from a steep loss to edge higher 2/32 and yield 4.69%, down from 4.70% the previous session.

In shorter-dated maturities, the five-year lost 2/32 of a point to yield 4.46%, while the two-year edged lower 1/32 to yield 4.49%. The three-month bill was yielding 4.44%. Bond prices and yields move in opposite directions.

The 10-year posted its largest three-day drop in three months Thursday and saw its yield cross 4.50% for the first time since mid-December on strong economic reports that painted a picture of an economy still on a tear. Wall Street expects the


to raise the overnight lending rate to 4.50% next week, and fed fund futures continue to show a 76% chance for another rate hike in March.

Friday's duo of economic reports reaffirmed this view.

Fourth-quarter GDP growth came in at far weaker than expected at 1.1% vs. expectations for 2.8% growth, the Commerce Department said. GDP grew by 4.1% in the third quarter of 2005.

But even though the headline figure was shockingly low, a 13% plunge in defense spending weighed heavily on the report.

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"The more you look into that GDP number, the less soft it seems because pretty much the bulk of the miss from the headline was caused by the very unusual slowdown in government spending," says John Shin, senior economist at Lehman Brothers.

Shin says his firm still believes the U.S. will post 4% GDP growth in the first quarter of 2006, and that there are now even risks to the upside because they believe government spending will bounce back.

Also important, the core personal consumption price index, which excludes food and energy, rose 2.2%, up from a 1.4% gain in the previous quarter.

Consumption rose by 1.1% vs. forecasts that the figure would edge up only 0.5%.

Calming fears that a slowdown in housing will slow consumer spending, new home sales for December showed a 2.9% gain to 1.269 million, the Commerce Department said, higher than consensus forecasts for a rise to 1.225 million.

The headline number kept the pressure on bond prices, since some market strategists have been hoping that soft housing data could convince the Fed to stop raising interest rates after the Jan. 31 meeting.

Traders are bracing themselves for next week's full calendar of market-moving events, he says, which include the Federal Open Market Committee meeting, readings on personal income and spending, the core personal consumption expenditures reading for December and the Treasury's refinancing announcement.

"The market starts

next week on a soft note with the compelling story of a big volume selloff," says David Ader, bond market strategist at RBS Greenwich Capital.

"Part of that selloff surely anticipated the bearish events ahead

i.e. the strong January data and the refunding... but we don't think all has been anticipated and so further skew the risks to a continuation of the bearish sell off to more critical levels," he writes. Ader sees the 10-year yield hitting 4.60% in the near term, a level not seen since March 2005.

This week's declines in part reflected concerns that demand for the government's quarterly refunding sale of three- and 10-year notes and 30-year bonds will not be as robust as hoped. The size of the auctions will be announced on Feb. 1.

Indirect bidders, which includes foreign investors and pension funds, bought $5.4 billion, or 25.6%, of the $22 billion of Wednesday's two-year note auction, the smallest share since April 2005.

Foreigners have played a key role in Treasury auctions because their share of the market has increased to 52% as of November 2005, up from less than 35% in 2001. Their spending on Treasuries has kept long-term rates low in the U.S., fueling sectors including housing and consumer spending.