By Sue Chang and Deborah Levine, MarketWatch
SAN FRANCISCO (MarketWatch) — Treasury prices fell on Tuesday, pushing yields up for the fourth day, as investors sorted through a ratings agency’s decision to place most euro-zone countries on review for a possible ratings downgrade.
Yields on 10-year notes 10_YEAR +0.64% , which move inversely to prices, rose 2 basis points to 2.06%. A basis point is one-hundredth of a percentage point.
Thirty-year-bond yields 30_YEAR +0.83% increased 4 basis points to 3.05%.
Yields on 2-year notes 2_YEAR -1.50% slipped 1 basis point to 0.26%.
Late Monday, Standard & Poor’s put 15 euro-zone countries, including Germany and France, on negative “credit watch,” which could result in a downgrade in the next few months. Greece and Cyprus were excluded. S&P‘s ratings warnings
Bonds had been under pressure for most of Monday after German Chancellor Angela Merkel and French President Nicolas Sarkozy said they will seek a new treaty for the European Union to strengthen fiscal rules. But media leaks of the possible S&P move ahead of the announcement helped Treasury prices recover off lows during the session. Read about Treasury bonds, Merkel plan
“The euro-zone sovereign-credit saga remains the most compelling topic for potential market-moving impetus or headlines,” said David Ader, head of government bond strategy at CRT Capital Group. “The market is anticipating some ‘grand resolution’ out of the E.U. on Friday.”
The S&P on Tuesday also placed the European Financial Stability Facility’s triple-A rating on CreditWatch with negative implications.
The ratings agency said that given the structure of the bailout fund, were it to lower the ratings of one of the triple-A rated guarantor members, it would also cut the EFSF’s rating to “the lowest issuer rating we assign to the rated EFSF members we currently rate ‘AAA’, unless there are offsetting credit enhancements in place.”
“It’s difficult to envision what the actual impact of a credit downgrade of the euro zone’s AAA issuers would have on the broader market, if such a move does indeed occur,” said Kevin Giddis, president of fixed-income capital markets at Morgan Keegan & Co., in his daily commentary.
But “If the EFSF is indeed downgraded, it begs the question: who will backstop the backstopper?,” Giddis said.
