Two-year notes' yields set another all-time low By Deborah Levine, MarketWatch NEW YORK (MarketWatch) -- Treasury prices advanced on Tuesday, pushing yields on 10-year notes to a fresh 15-month low, after a government report showed U.S. housing starts fell more than expected, adding to growing evidence that faltering conditions in the housing market will continue to weigh on the U.S. economy. Yields on 10-year notes (UST10Y 2.91, -0.05, -1.65%) fell 5 basis points to 2.90%, the lowest level since April 2009. Bond prices move inversely to their yields. A basis point is 0.01%. Yields on 2-year notes (UST2YR 0.58, -0.01, -2.03%) traded down 1 basis points to 0.58%, after touching a new record low of 0.56%. Housing starts dropped 5% in June to a 549,000 annualized pace, the lowest in eight months, the Commerce Department said Read story on housing starts. The data "darkened the mood further," said Kevin Giddis, president of fixed income capital markets at Morgan Keegan. "There are plenty of reasons to worry about the depth of the U.S. economy's economic recovery, and it follows that I believe just as strongly that higher-quality instruments like Treasurys stand to benefit as this becomes more of a mainstream view." Bond traders are also eyeing the U.S. corporate earnings parade while awaiting Federal Reserve Chairman Ben Bernanke's congressional testimony starting Wednesday and results on Friday of European Union-administered bank "stress tests." "Outside of the U.S. tug-of-war between stocks and bonds, we believe the focus is on Bernanke and the E.U. stress tests," said George Goncalves, a strategist at Nomura Securities. "We view both of those events as bond-market friendly." The S&P 500 Index (SPX 1,065, -6.17, -0.58%) fell 1% in early trading on Tuesday. On Monday, Treasury prices fell, reacting to rising equities. The only main data of the day was a disappointing read on home builder's confidence. See Monday's Bond Report. While concerns about the economy dipping back into recession has increased, one bond-market metric, the slope of the so-called yield curve, remains comfortably pointing to some level of growth. "The yield curve has been a very accurate, and often overlooked, indicator of future economic conditions," said Kully Samra Charles Schwab's U.K. branch director. The gap between short- and long-term yields has shrunk in recent months as investors sought the relative safety of government debt but a higher yield than short-term debt offered. A very small gap, or negative gap if shorter-term yields are higher than longer-term ones, tends to be a good predictor of a recession. The gap between 2-year and 10-year yields has shrunk to about 2.33 percentage points, down from a high of 2.93 points in February. But the current level is still well above the average gap since 1998, around 1.25 points, analysts said. So as for a double-dip recession, "We believe that the possibility of such an event is still relatively remote," Samra said.

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