Treasurys end lower as quarter closes

Treasury prices erased morning gains and ended slightly lower Friday, a bland conclusion to a third quarter marked by vigorous rallies and a sharp shift in investor sentiment away from risk and toward safety.

Throughout most of Friday, Treasury prices were higher as portfolio managers made additions to fixed-income funds. However, professional investors cashed in some profits and drove prices a touch lower at the close.

New data Friday showed brisk consumer spending, contained inflation and stronger commercial construction, undercutting the picture of economic peril that has driven demand for low-risk Treasurys this quarter

The benchmark 10-year Treasury note fell 5/32 to close at 101 8/32 with a 4.59 percent yield, up from 4.57 percent at Thursday's close. Prices and yields move in opposite directions. The 10-year yield began the quarter at 5.02 percent.

The 30-year benchmark bond dropped 2/32 to 102 16/32 with a 4.84 percent yield, little changed from its close on Thursday. The 30-year yield started off the third quarter at 5.12 percent.

The 2-year note fell 1/32 to 100 2/32 with a 3.97 percent yield, up from 3.95 percent on Thursday. The 2-year yield began the quarter at 4.86 percent.

The yield on the 3-month Treasury bill rose to 3.80 percent from 3.71 percent, and the discount rate advanced to 3.70 percent from 3.62 percent.

Throughout the third quarter, Treasury prices were supported by belief they are a shrewd investment if housing market weakness threatens the broader economy and inflation increases. The recent half percentage point rate cut by the Federal Reserve intensified the inflation worries because cheaper money often leads to higher prices.

Analysts were uncertain whether the third-quarter Treasury rally will stretch into the final quarter. Joel Marver, a Treasury analyst for Thomson Financial, said exceptionally strong volatility in the July-September period has made it very difficult to project on a technical basis where yields will be at the end of the upcoming fourth quarter.

Peter Cardillo, chief market economist at Avalon Partners, said fundamental factors such as data and spot news suggest Treasury yields will be range-bound between now and the end of 2007.

He predicted the 10-year yield will wrap up the year at 4.75 percent, which would indicate some selling pressure in the upcoming period.

"I think we are still data dependent, and the jury is still out whether the Federal Reserve has to cut rates one more time," Cardillo said. "If you look at the numbers coming out, they still point to economic growth, but slower electronic growth."

On Friday data reports were overshadowed by the end-of-quarter activity.

The Commerce Department said consumer spending increased 0.6 percent in August, the fastest growth in more than two years and ahead of analysts' expectations.

A closely watched gauge of inflation was up just 1.8 percent in August, compared to the same period a year ago, the smallest increase since a similar rise in February 2004. The Federal Reserve has said it is comfortable with inflation in the 1 percent to 2 percent range.

Separately, Commerce said spending on nonresidential projects jumped 2.3 percent in August. Commercial building has been the lone bright spot in the embattled construction industry as housing building has languished.

The nervousness investors have felt about the economy this quarter was evident in the final reading of the University of Michigan's survey of consumer sentiment for this month. The headline figure fell to 83.4 from 83.8 in early September.