Worries about European debt show few alternatives to U.S. bonds
By Deborah Levine, MarketWatch
NEW YORK (MarketWatch) — Treasury prices recovered from slight pressure during the European trading session Tuesday, leaving 10-year yields near their lowest level in more than three weeks, as investors kept watch on developments in European peripheral debt.
U.S. bonds held on to gains notched Monday after Standard & Poor’s assigned the U.S. a negative outlook on its AAA credit rating, spooking the stock market.
“There are really not a whole lot of alternatives to U.S. Treasurys” for bond investors, said Jason Brady, who helps oversee about $4 billion in fixed-income assets at Thornburg Investment Management. “A lot of folks are invested in bonds for a lot of reasons and invested in dollars for a lot of reasons, and an S&P outlook change is not going to alter that in the short term.”
Yields on 10-year notes UST10Y -0.27% , which move inversely to prices, turned down by 1 basis point to 3.38%. A basis point is 1/100th of a percent. Earlier, yields on the benchmark securities fell to 3.36%, near the lowest levels since late March.
Yields on 2-year notes UST2YR 0.00% fell 2 basis points to 0.65%.
Thirty-year bond yields UST30Y -0.18% declined 1 basis point to 4.45%.
Treasury prices touched their lows of the session, falling along with the dollar, after Greece received good demand at its auction of 3-month bills. See story on Greek auction, dollar.
“The market’s overnight stability is notable,” said strategists at CRT Capital Group. Regarding Greek and other European bonds under pressure lately and “ostensibly suffering from similar ailments, it’s clear Treasurys have come out as the lesser of the evils.”
On Monday, S&P lowered its outlook for the U.S. credit rating, citing lack of agreement by policy makers on a credible deficit-reduction plan. And yet yields fell, stumping many. See more on S&P, Treasury bonds.
Bonds’ ability to rally after the outlook change “doesn’t mean it’s not a big deal, but maybe the most useful thing about it is to focus the attention of the folks in Congress that there are consequences of the decisions they make,” Brady said. “It’s probably a good thing for the market to point to as something for lawmakers to fix.”
Treasury prices slipped briefly Tuesday after a government report showed U.S. housing starts rose more than expected in March. Read story on housing starts.
Analysts noted, however, that the housing market remains deeply depressed and that fewer new homes would be better for the economy, to clear the bloated inventory of homes on the market.
“Given the structural headwinds at work in the housing market, a lower level of starts is absolutely necessary to help clear the market even if the lack of residential construction drags on economic growth in the near term,” said Dan Greenhaus, chief economic strategist at Miller Tabak.
Also, gains in U.S. stocks Tuesday, indicating investors are more comfortable with riskier assets again, capped any advance by bonds.
Still to come is a Federal Reserve buyback of bonds, the centerpiece of the Fed’s loose monetary policy. See recent Fed buyback results.
In November, the Fed said it would buy an additional $600 billion in U.S. bonds to support economic growth.
That followed a plan announced in August, saying the central bank would invest cash from maturing mortgage-related debt back into Treasurys. The amount of reinvestment under that program is in part influenced by mortgage rates and expected debt prepayment.
Through Monday, the Fed has bought $608 billion in notes and bonds under the program, according to Morgan Stanley.
The Fed said about $225 billion of the purchases completed and expected through mid-May stem from the mortgage reinvestments.
While trading volume was strong Monday and continued to be high Tuesday, analysts noted that may dry up due to religious holidays and a shortened week.
The Securities Industry and Financial Markets Association recommends U.S. bond trading to end at 2 p.m. Thursday and remain closed for Good Friday.
Because of that, the government’s only debt auction this week — of 5-year inflation-indexed notes — will end early, at 11:30 a.m. Eastern time Thursday.
