DECEMBER 31, 2010, 3:58 P.M. ET.

Treasurys Gain 5.51% in 2010

By DEBORAH LYNN BLUMBERG

NEW YORK—Treasurys prices rose on the final trading day of 2010, allowing the government bond market to end a volatile year on a high note.

U.S. government debt posted gains of 5.51% for 2010, according to Barclays index data. TIPS, or Treasury inflation protected securities, chalked chalk up gains of 5.84% for the year.

With no key data, Treasury auctions or bond buying from the Federal Reserve on Friday, a primary driver of trading was month-end buying from fund managers who needed to match adjustments to their benchmark indexes. On the last trading day of each month, newly minted bonds replace maturing debt in those indexes.

Higher prices came ahead of the Federal Reserve's plan to buy an expected total of $21.5 billion to $29.5 billion in the first week of the new year. Buying is part of its $600 billion bond buying program launched this year to support the economy.

In afternoon trading, the two-year note was up 3/32 to yield 0.597%, and the 10-year was up 20/32 to yield 3.290%. The five-year note was up 8/32 to 2.013%, and the 30-year Treasury was up 1 10/32 to 4.345%.

The bond market this year braved its way through a record year of debt sales and rallied hard as concerns about fiscally strapped euro-zone nations took hold. But prices have weakened over the last few months amid signs that the U.S. economy will improve in 2011.

The benchmark 10-year Treasury yield hit a high of 4.017% in April before plummeting to a low of 2.332% in October. Since then, yields have again climbed, with the 10-year at 3.290% on Friday. A year ago, the 10-year Treasury yield was at 3.837%.

Friday's gains came in thin trading. Trading volumes have been low the last few weeks as the Christmas holiday and a huge snowstorm hit the northeast coast of the U.S., keeping many traders at home.

Market participants are looking forward to the start of the new year, when desks again will be fully staffed and investors start to put on trades to capitalize on their 2011 strategies. Treasurys could do well as investors redeploy cash into the government bond market.

The 10-year sector has rallied in the first week of January in four out of the last five years, said David Ader, head of government bond strategy at CRT Capital Group pushing down yields by an average of 0.074 percentage points.

Longer-term, however, many believe Treasury prices will likely fall, and yields rise, as the U.S. economy improves more and investors move away from low-risk government bond and into riskier, higher-yielding assets. That could spell trouble for the government as it auctions off close to a record amount of debt again in 2011.

Higher Treasury yields could be worrisome for the economy since Treasury yields are a yardstick for pricing other forms of credit. A rise in yields means borrowing costs for consumers and businesses could rise.

A highlight of the new week will be the latest jobs report, out Friday. Economists surveyed by Dow Jones are expecting a gain of 140,000 jobs in December after a 39,000 gain the prior month, and for the jobless rate to remain steady at 9.8%. If they are much stronger than expected, that could set the bond market on the path to higher yields.

Later than day, Fed Chairman Ben Bernanke's Congressional testimony on the economy will also be closely watched for any changes in his assessment as the new year gets under way.

As the new year begins, "the focus will be on whether Treasury yields will rise in 2011, and if so, by how much," said Kevin Giddis, president of fixed income capital markets at Morgan Keegan & Co.

He said he believes yields will head higher amid a brighter outlook for earnings, balance sheets and growth, which will likely translate into higher home prices, more loans and an increase in employment.

Write to Deborah Lynn Blumberg at deborah.blumberg@dowjones.com

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