MW: Two-year yields fall to fresh record as investors flee stocks
Ten-year note yields retreat below 3% as 30-year's sink under 4% mark
By Deborah Levine, MarketWatch
NEW YORK (MarketWatch) -- Yields on 2-year Treasury notes fell to the lowest on record Tuesday, as U.S. bonds benefited from fresh worries about global growth, this time stemming from economic data in China as well as concerns about the financial health of European banks.
A plunge in U.S. consumer confidence also weighed on investors' willingness to buy assets like stocks and commodities amid growing doubts about a global economic recovery.
"The fear of the unknown is causing many risk-adverse trades and a major flight to quality," said Andrew Brenner, head of emerging markets at Guggenheim Securities.
Strategists at RBS Securities cited "fears of sweeping developed-world fiscal austerity."
Yields on 2-year notes (UST2YR 0.60, -0.03, -4.30%) , which move inversely to prices, fell as low as 0.59%, the lowest ever on an intraday basis. They recently traded at 0.61%, down 2 basis points, or 0.02%.
Two-year notes last hit this level in December 2008, just after the Federal Reserve put through its most recent interest-rate cut to counteract the global economic crisis. The U.S. central bank has held rates at ultra-low levels since then.
The 2-year's yield has fluctuated since then, going as high as 1.31% last summer, as investors began pricing in rate hikes by the Fed -- increases that never came to pass.
Indeed, Fed policy makers last week struck a less-optimistic tone about the economic outlook and said underlying inflation has trended lower. See more on latest meeting of Federal Open Market Committee.
Also lower, yields on 10-year notes (UST10Y 2.96, -0.06, -1.95%) fell 5 basis points to 2.97%. They earlier touched 2.96%, the lowest since April 2009.
And yields on 30-year bonds (UST30Y 3.96, -0.04, -1.02%) declined 3 basis points to 3.97%. They haven't closed below 4% since October.
Also supporting the notion of an economic slowdown, the Conference Board's consumer confidence index plummeted to 52.9 in June -- the lowest level since March -- from a downwardly revised 62.7 in May. See more on consumer confidence.
"The current level remains way below previous recoveries, an important leading indicator with respect to consumer attitudes and potentially spending patterns," said Dan Greenhaus, chief economic strategist at Miller Tabak.
"While the recession may have technically ended last summer, consumers remain skittish about job and income prospects and are refraining from consuming in a sufficient enough manner as to create substantial growth in GDP," he said.
Earlier, Treasury prices stayed higher after the S&P/Case-Shiller home price index for April rose 0.8%. See more on the most recent data compiled on home prices in 20 U.S. metropolitan areas.
The shift during European and Asian stock trading hours also narrowed the gap between 2-year and 10-year note yields, a measure watched by bond traders as one indication of the outlook for economic growth and benchmark interest rates. A smaller gap between the yields flattens the so-called yield curve.
"The door is now open for a bull flattening that should take 10-year notes to 2.75%," the RBS strategists said.
Analysts also noted there are no note or bond auctions scheduled until July 12, an unusually long gap as U.S. government auctions have lately come every other week, putting pressure on the market to absorb the additional supply of debt.
Further, investors who try to mirror holdings with often buy bonds at the end of every month. They seek to match the duration of their portfolios, which is partially determined by maturity, to new securities that have been issued and added to benchmark indexes during the month.
"We have some hope that once month-end passes and all it entails then there's a rebalancing in bonds versus stocks, small and brief, and a respite in the bond bid as portfolios rethink positioning for the second half," said strategists at CRT Capital Group.
"That doesn't mean that the market's supposed to reverse," they told clients. "All the issues vis-à-vis double dips and inflation remain very much in place and the risks universally skewed to more yield-depressing news."
