US Treasury prices rise

US Treasury prices rose on Tuesday after dismal housing data underpinned bond investors' hopes for a Federal Reserve interest rate cut at month-end. Meanwhile, a dip in crude oil prices below $80 per barrel hurt energy shares, dragging Wall Street stocks down from record highs and sending some investors into safe-haven assets such as US government bonds.
Short-term US interest rate futures showed the perceived chance of a 25-basis-point Fed rate cut on October 31 had risen to about 76 percent from about 68 percent before data showing pending homes sales fell three times more than forecast.
"The thought is that the next move by the Fed is most likely lower, which is keeping a bid to the Treasury market," said William Bellamy, director of fixed-income at Thompson, Siegel & Walmsley in Richmond, Virginia. Benchmark 10-year Treasury notes rose 5/32 in price for a yield of 4.53 percent, compared with 4.55 percent late on Monday.
"Pending home sales was a bit weaker than expected and put a little bid into the market," said Sean Simko, a fixed income portfolio manager with SEI in Oaks, Pennsylvania. August's hefty 6.5 percent retrenchment in pending home sales compounded a two-year slide that some describe as one of the worst housing slumps on record.
Investors worry that a deeper housing slump will hit banks even harder, preventing them from making new loans and accentuating the problems that have plagued the global financial system since the start of August. "The housing recession continues," said Jim O'Sullivan, economist at UBS.
The US government bond market has heavily factored in the housing market decline, with analysts saying it will take an ever-increasing amount of bad news on housing to power government bonds any further, since these safe-haven assets had already priced in a continued worsening of conditions.
Bonds did not initially move much after former Federal Reserve Chairman Alan Greenspan told a business audience in London that central bankers "now have to be very sensitive to the fact that inflationary pressures could well get out of hand." The Federal Reserve watches the jobs report closely when making interest rate decisions.
The two-year note -- which responds closely to expectations for central bank interest rate moves -- traded up 2/32 in price for a yield of 3.97 percent, compared with 4.01 percent late on Monday.
But some dealers fear a rebound in hiring following last month's surprise contraction could reignite investors' willingness to re-embrace riskier assets, to the detriment of government debt. The 10-year US interest rate swap spread narrowed slightly to 62.50 basis points, from 62.75 basis points on Monday.