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Bond prices mixed

January 25, 2010 | "CNNMoney"

NEW YORK (CNNMoney.com) -- Bond prices were mixed Friday, after rallying on Thursday, as investors looked ahead to next week's auctions.

What prices are doing: The benchmark 10-year note fell 4/32 to 98-4/32, and the yield rose slightly to 3.61% from 3.60% late Thursday. Bond prices and yields move in opposite directions.

The 30-year bond dropped 21/32 to 97-13/32, and its yield rose to 4.54%. The 2-year note edged up 2/32 to 100-13/32 and yielded 0.80%.

On Thursday, bond prices were boosted by weaker equities as the Dow fell more than 200 points.

What's driving prices: "The bond market had a great run this week," said Michael Cheah, a bond fund manager at financial services firm SunAmerica. "Now we're seeing profit-taking as well as straight positioning ahead of the auction next week."

The U.S. Treasury Department plans to sell $118 billion of two-year, five-year and seven-year notes next week.

With a lack of economic data, Treasurys will typically move inversely with the stock market, Cheah said.

What analysts are saying: "Going into next week we will look to see whether the Chinese government will announce more measures to tighten policy," said Cheah. "To some extent there is a fear that China will slow down and that would have an impact on risk taking."

President Obama's plan to curb banking activities could also affect bond prices, Cheah added.

"If over the weekend into next week some banks pay people extremely well, [Obama] may be forced to be more hawkish because of the general sentiment against gigantic bonuses as the result of excessive risk-taking," said Cheah.

Looking into 2010, he said that economic issues could escalate in weaker euro zone countries, including Portugal, Italy, Ireland, Greece and Spain, causing investors to shy away from riskier assets and flock to the safety of bonds.

"Last year was the year of liquidity, this year is the year of exit," he said. "The way the exit is being done is like a giant game of Jenga, and depending on which block is removed they are going to send the whole thing tumbling.

By Blake Ellis

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