Treasurys fall on hints of recovery

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NEW YORK (CNNMoney.com) -- Treasury prices fell Friday after better-than-expected readings on manufacturing and consumer sentiment encouraged investors to lock in profits at the end of an up week.

On the credit front, a closely watched short-term lending rate fell to another all-time low as banks become more confident.

An index of manufacturing business conditions in New York fell in early May at a much slower rate, suggesting that economic conditions are stabilizing. Consumer sentiment also showed signs of improvement. Separately, government data showed inflation was mostly subdued in March.

The market is responding to "relatively positive numbers for the economy," said Kim Rupert, fixed-income analyst at Action Economics. "It's more profit taking, which is boosting yields."

Friday's retreat comes at the end of a strong week, with the yield on the 10-year note falling about 5 basis points. Bond prices and yields move in opposite directions.

The market was supported this week by a pause in the government's auction schedule and economic reports that cast doubt on the notion that the U.S. economy is headed for a speedy recovery, Rupert said.

A total of $172 billion in Treasurys came to the market in the first two weeks of May as the government completed its quarterly refunding. That highlighted concerns in the bond market that supply could outweigh demand as the government issues record amounts of debt to fund its various economic stimulus efforts.

The Treasury Department said net foreign purchase of long-term U.S. securities totaled $55.8 billion in March versus sales of $22 billion the month before.

Purchases by foreign investors, including foreign official institutions, were $56.8 billion, according to the Treasury International Capital (TIC) report.

China, the largest overseas holder of U.S. debt, increased its holdings by $23.7 billion in March to 767.9 billion. Beijing has expressed concern about its exposure to U.S. debt as Washington continues to expand the nation's deficit.

"Even though China suggests it may be rebalancing its portfolio away from Treasurys the data don't really confirm this," Rupert said.

Looking ahead, the bond market will focus on the Federal Reserve's meeting minutes Wednesday for clues about the central bank's quantitative easing plans. Many analysts had expected the Fed to expand the scope of its Treasurys buying campaign at its last meeting.

The Fed bought $12.5 billion worth of Treasurys this week as part of its plan to drive down interest rates by purchasing $300 billion worth of U.S. debt.

Bond prices: The benchmark 10-year note was down 9/32 to 99 28/32 and its yield rose to 3.13% from 3.10%. Bond prices and yields move in opposite directions.

The 30-year bond fell 21/32 to 102 27/32 and its yield increased to 4.08% from 4.06%.

The 2-year note fell less than 1/32 to 100 1/32 and its yield was 0.85%.

The yield on the 3-month was unchanged at 0.16%.

Lending rates: A key bank-to-bank lending rate fell to an all-time low Friday, suggesting the credit crisis is waning for many financial institutions.

The 3-month Libor fell to 0.83% from 0.85% Thursday, according to Bloomberg.com. Last week, the 3-month rate dropped below 1% for the first time since 1986, when the British Bankers Association started keeping records.

The overnight Libor rate edged higher to 0.225%.

Libor, the London Interbank Offered Rate, is a daily average of rates that 16 different banks charge each other to lend money in London. The closely watched benchmark is used to calculate adjustable-rate mortgages. More than $350 trillion in assets are tied to Libor.