US bond prices fall

US Treasury prices fell on Tuesday as stocks overcame banking sector worries in a late-day rebound, quashing the safe-haven bid for government bonds. The turnaround in financials took off after Goldman Sachs denied rumours it faced large write-downs. But credit market jitters could flare up again at any time and restore Treasuries' lustre, strategists said.
"This morning, stocks turned around and have been in rally mode ever since. That has pulled flows out of bonds," said Don Kowalchik, a debt strategist at A.G. Edwards & Sons in St. Louis. The benchmark 10-year Treasury note traded down 10/32 in price for a yield of 4.38 percent, compared with 4.34 percent late on Monday. Bond yields and prices move inversely.
"Bonds are so expensive and there has been such a flight-to-quality across the curve. And it is almost like who blinks first - the stock market or the bond market. Today it seems bonds blinked first," Kowalchik said.
US government debt has been intermittently tapping a safe-harbour bid as news of financial institutions' exposure to subprime mortgages and other riskier assets filters out. The 4.30 percent mark on the 10-year note, which lies just above a two-year low hit on Monday, formed a near-term floor for the benchmark maturity's yield, some analysts said.
"Right now it is the level of financial stress that is the most important issue. The economy for now is taking a back seat," said Marcus Huie, interest rate strategist with Deutsche Bank Securities in New York. Few traders were willing to call a bottom in yields, as uncertainty and mistrust continued to pervade financial markets amid the worst credit squeeze in at least a decade.
Any fresh signs of strain in the banking sector, just two days after Citigroup's CEO Charles Prince resigned and the largest US bank announced up to $11 billion in debt write-downs, would likely help bonds. The two-year note, which is particularly sensitive to expectations for Fed interest rate shifts, traded down 1/32 in price for a yield of 3.70 percent, from 3.68 percent late on Monday.
Given the persistent worries about credit markets, Treasury yields have the potential to hold near two-year lows even though they are trading well below the 4.50 percent fed funds target rate for overnight lending the Federal Reserve sets, strategists said. The 10-year US interest rate swap spread narrowed slightly to 71.25 basis points on Tuesday after jumping nearly five basis points wider to 72.25 basis points Monday as investors' risk aversion surged.