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Treasurys rise as China trade data weaken

Updating to correct the spelling of Gary Pollack's name.

LOS ANGELES (MarketWatch) -- Treasury prices rose Friday as global enthusiasm for riskier assets waned following recent gains and as another troubling sign in data from China underscored worries about the global economy.

The yield on the benchmark 10-year note (10_YEAR) slipped to 1.66%, a notable pullback after holding above 1.7% for much of the previous session. Bond prices move inversely to their yields.

Data from China showed an unexpected shrinking of the trade surplus generated in July by the world's second-largest economy, with exports rising just 1% from the year-ago period. A 4.7% rise in imports was smaller than anticipated. Read more about China July trade surplus unexpectedly shrinking

China's trade surplus dropped to $25.1 billion, less than the Dow Jones Newswires consensus estimate of a $35.2 billion surplus.

Treasury prices started their move higher on Thursday after the government sold $16 billion in 30-year bonds at a yield of 2.825%. The government this week also sold $32 billion in 3-year notes and $24 billion in 10-year notes.

"All three auctions did not meet strong demand," and bid-to-cover ratios and other metrics were "disappointing," said Gary Pollack, head of fixed-income trading at Deutsche Bank AG's private-wealth-management unit in New York.

But when the 30-year auction was over, it appeared that "the market suddenly took its head out of the sand and realized, 'There's no supply for the next week and a half. The Fed has to buy bonds almost every day, we've cheapened up quite a bit. Maybe we call rally a little bit from here.' " said Pollack.

In the 30-year auction, bidders offered to buy 2.41 times the amount of debt sold, compared with an average of 2.65 times at the last four sales. Demand from direct bidders, which include domestic money managers, was off, as they purchased 7.7% compared with an average of 18%.

The 10-year note's yield rose 8 basis points this week, and is about 30 basis points higher than record-low yields reached in July, when worries heightened about Spanish debt.

The unexpected shrinking of China's trade surplus that lent support to bonds rattled global stocks on Friday, though U.S. stocks sloughed off losses late in the session. On Wall Street, the S&P 500 Index (SPX) closed up 0.2% and the Dow Jones Industrial Average (DJIA) advanced 43 points to 13,207.95. Each posted gains for the week. More about U.S. stocks in Market Snapshot.

A "collapse" of Asian exports in July "was largely due to weaker euro area and emerging market growth," said analysts at Nomura on Friday. "The focus should turn to U.S. macro data, which will set the tone for spending in [the third quarter]."

Among the releases due next week are U.S. July retail sales on Tuesday, July industrial production on Wednesday and July factory activity figures from the Philadelphia region on Thursday.

Until the U.S. Federal Reserve's annual retreat in Jackson Hole, Wyo., later this month, and U.S. and European central bank meetings in September, "I think the market just remains in a very narrow range. You might see a little rally in Treasurys only because [yields] have backed up so much," and see a pull back in equities after their gains, said Pollack. "In that environment, I think you might see slightly lower yields next week."