Treasuries Close Modestly Lower After Seeing Initial Strength

(RTTNews) - After failing to sustain an initial upward move, treasuries turned lower over the course of the trading day on Monday.

Bond prices pulled back into the red in morning trading and moved roughly sideways thereafter. As a result, the yield on the benchmark ten-year note, which moves opposite of its price, ticked up by 2 basis points to 2.34 percent.

The early strength among treasuries was partly due to concerns about the global economy following the release of data indicating that Japan has unexpectedly slipped into a recession.

A report released by Japan's Cabinet Office showed that Japanese GDP contracted by an annualized 1.6 percent in the third quarter, while economists had expected a 2.2 percent increase.

Following the 7.3 percent drop seen in the second quarter, Japanese GDP has now contracted for two straight quarters, which represents the technical definition of a recession.

With the disappointing data, Peter Boockvar, managing director at the Lindsey Group, noted, "Six of the top 10 economies are essentially not growing and these six countries make up about 25 percent of the global economy.

Early buying interest was also generated by a report from the Federal Reserve showing an unexpected drop in U.S. industrial production in the month of October.

The Fed said industrial production edged down by 0.1 percent in October following a downwardly revised 0.8 percent increase in September. Economists had expected production to inch up by 0.2 percent.

Treasuries were unable to sustain the upward move, however, as traders seemed reluctant to continue buying bonds amid worries about higher interest rates.

The subsequent pullback came on the heels of comments from European Central Bank President Mario Draghi indicating that the ECB is willing to consider purchasing government bonds to stimulate the economy.

"If necessary to further address risks of too prolonged a period of low inflation, the Governing Council is unanimous in its commitment to using additional unconventional instruments within its mandate," Draghi said in testimony to the European Parliament.

He added, "In this context, we have also tasked relevant ECB staff and Eurosystem committees with the timely preparation of further measures to be implemented, if needed."

Draghi's remarks contributed to some strength among European government bonds, leading some traders to pull money out of treasuries.

U.S. economic data may attract some attention on Tuesday, with traders likely to keep an eye on reports on producer price inflation and homebuilder confidence.