US Treasury debt prices climbed on Tuesday as record high oil prices heightened prospects of dwindling consumer spending, while plunging stock prices boosted the safe-haven demand for bonds. Investors fear soaring energy costs will hit buyers' wallets hard and that corporate profits will suffer.
As a result, investors dumped higher risk assets like equities and bought into the perceived lower risk of government debt. US crude oil jumped to record highs above $129 per barrel as influential Texas oil man T. Boone Pickens forecast a rise to $150 this year.
The faltering stock market on Tuesday set the direction for bonds, trumping bond trader worries about inflation despite a government report that producer prices, excluding food and energy, grew at a faster-than-expected pace in April. "Equities have obviously been weaker all day and extended declines throughout the session, so you have been seeing an asset-allocation trade back into bonds," said Kim Rupert, managing director of global fixed-income analysis at Action Economics in San Francisco.
Benchmark 10-year Treasury notes traded 12/32 higher in price for a yield of 3.79 percent from 3.83 percent late on Monday, while 2-year notes traded 5/32 higher in price for a yield of 2.33 percent from 2.41 percent. Investors saw further evidence of a struggling economy after two of the largest US retailers - Home Depot Inc and Target Corp - reported lower earnings and warned results for the rest of the year would be sluggish.
"We traded above $129 a barrel for crude oil and investors have started to get evidence that the high cost of energy is beginning to affect corporate earnings," said William Sullivan, chief economist at JVB Financial Group in Boca Raton, Florida. High oil prices can be a double-edged sword for bonds - the potential for slower consumer spending can boost debt prices, but the possibility of energy-fuelled inflation can also be bad for Treasuries because inflation erodes a bond's value over time.
Treasuries were also bolstered by a fall in shares of banks, including J.P. Morgan Chase & Co and Citigroup Inc, after an influential analyst at Oppenheimer & Co warned that the credit crisis will result in three years of multibillion-dollar revenue declines for banks. Five-year notes traded 10/32 higher in price for a yield of 3.02 percent from 3.09 percent late on Monday, while the 30-year bond traded 20/32 higher for a yield of 4.54 percent from 4.58 percent.
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