U.S. Government bonds gain on weak risk sentiments, investors cover short positions

The U.S. Treasuries gained Thursday as investors poured into safe-haven assets following losses in stock markets. Also, investors covered previous short-positions, booked after the Federal Reserve raised interest rates for the first time this year and signalled at a faster hike in borrowing costs next year.

The yield on the benchmark 10-year Treasury note, which moves inversely to its price, fell more than 2 basis points to 2.48 percent, the super-long 30-year bond yield dipped 1 basis point to 3.07 percent and the yield on short-term 2-year note slid 1-1/2 basis points to 1.24 percent by 12:00 GMT.

The USD34 billion 5-year note auction came in at 2.057 percent (5.64 percent award at high) with a bid-to-cover ratio of 2.72, non-comps of USD50.9 million, an indirect bid of 71.4 percent and a direct bid of 4.1 percent.

Also, the U.S. equities moved downwards with the Dow index declining -111.36 points or -0.56 percent to 19,833.68. Meanwhile, the S&P 500 index was down -18.96 points or -0.84 percent to 2,249.92.

Markets now look ahead to a lighter flow of data, highlighted by initial jobless claims, crude oil inventories followed by 7-year note auction.

However, we expect Treasuries will continue to drift lower in the coming weeks as markets look to assess the relative strength of data as we move into 2017, something that could yield a slightly more aggressive Fed than was laid-out by the updated FOMC forecasts in December (already looking for 75 basis points of tightening over the course of the year).

Last week, the Federal Reserve Chair Janet Yellen commented that the United States is now seeing its strongest labour market in nearly a decade as job creation has continued at a relatively steady pace. Also added that she has seen signs of wage growth improving and that weekly earnings for younger workers are making strong gains.

The Federal Open Market Committee increased the fed funds rate to a 0.50-0.75 percent range on December 14, as widely expected. The statement noted that information received since the November meeting indicates that the labour market has continued to strengthen and that economic activity has been expanding at a moderate pace since mid-year.

Also, the new projections showed that the central bankers expect three quarter-point rate increases in 2017, up from the two seen in the previous forecasts in September, based on median estimates.

Lastly, we foresee that Treasury prices will keep drifting between small gains and losses in quiet trading session. Also, trading activity will resume after New Year celebrations, probably from the second week of January, 2017 as global market receives no more important data till then.

Meanwhile, the S&P 500 Futures traded flat at 2,246 by 12:30 GMT. While at 13:00 GMT, the FxWirePro's Hourly Dollar Strength Index stood neutral at -21.81 (lower than -75 represents a bearish trend).