Treasuries flat

US Treasuries ended mostly flat on Tuesday with two-year yields touching a record low, as more weak housing data reinforced the notion of a slowing recovery and the Federal Reserve sticking to easy monetary policy. A late rebound on Wall Street restrained buying of bonds, wiping out their initial gains. Stocks had traded lower on a bigger-than-expected decline in housing starts and disappointing results from Goldman Sachs Group Inc and Johnson & Johnson, analysts said.
"There has been a lot of bad news built into the market. Some of the flight-to-safety may be overdone," said Brian Rehling, senior fixed income strategist with Wells Fargo Advisors in St. Louis, Missouri. Traders also pared their bullish bond holdings in advance of Fed Chairman Ben Bernanke's semi-annual testimony before Congress. Analysts said that while almost no one expects surprises in Bernanke's view on the economy and monetary policy, some traders decided to book profits just in case.
Meanwhile, hopes that most European banks will pass the regulatory tests helped to revive risk appetite and reduced the allure of bonds. "People seem to think things will look pretty good and they are moving back to take some risks," Rehling said of the expected results from the European bank stress tests.
European regulators are aiming to shore up confidence in the region's banking system and to assess whether member banks have adequate capital to handle the region's sovereign debt problems. Nascent optimism over the European stress tests did not dispel chatter of a double-dip US recession in the wake of more negative developments in housing once government incentives expired.
US June housing starts fell 5 percent from May to an eight-month low. Prospects of renewed US economic weakness supported bets that the US central bank will cling to a near zero interest rate policy well into 2011. Bonds will also likely fare better than stocks in this low growth and inflation climate.
Two-year Treasury notes, which are sensitive to the market's outlook on Fed policy, were unchanged in price. They were yielding 0.60 percent after briefly touching a record low of 0.5764 percent. Benchmark 10-year Treasury notes rose 3/32 to 104-20/32 after hitting a session high at 105-4/32. They were last yielding 2.95 percent versus 2.96 percent late Monday.
Year-to-date, Treasuries have earned a total return of 6.06 percent, according to Barclays Capital. This compared with a 3.9 percent decline of the Standard & Poor's 500 index. On Tuesday, the S&P 500 and other two major stock benchmarks were up about 1 percent.