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US government debt prices rose on Tuesday as a rush of unsettling news from home builders bolstered the view that the housing downturn will continue to weaken economic growth.
The news helped the market recover from a two-day selloff that followed Friday's unexpectedly strong employment report, strategists said. "Nothing gets the bond market going like bad news from the housing sector," said Tony Crescenzi, chief strategist with Miller Tabak + Co in New York.
Toll Brothers Inc, a luxury home builder, issued a profit warning and Beazer Homes USA Inc, one of the largest US builders of single family homes, said quarterly earnings fell 44 percent.
Shares of Technical Olympic USA plunged after the home builder disputed a demand for payment and KB Home received a bond default notice because it has not filed its quarterly earnings report. The results filing was delayed by issues related to options accounting.
While the reports were the latest sign that America's long housing boom has stalled, most of the news was not unexpected by the market. It "doesn't go much beyond what is already priced in, so I do not see the news as a catalyst for a lasting rally," added Crescenzi. Bond investors have been paying close attention to events from the housing industry as signs that the sector is slowing more rapidly than expected may force the Fed to cut rates.
Former Federal Reserve Chairman Alan Greenspan, for his part, said on Monday that the housing market will weaken further but that the worst is over. If that is the case, it will likely push back the timing of any interest rate cut as the Fed focuses on inflationary pressures from a tight labour market.
Benchmark 10-year notes were up 8/32 in price, their yields having eased to 4.66 percent from 4.70 percent on Monday. Bond prices and yields move inversely. Two-year notes were up 2/32 in price for a yield of 4.77 percent, down from 4.81 percent late on Monday.
Also grabbing traders' attention was this 0week's $32 billion quarterly refunding. The Treasury Department will auction $19 billion in 3-year notes on Wednesday and $13 billion in 10-year notes on Thursday. Treasury prices usually fall before an auction as traders position for the added supply. Tuesday's rally, however, pulled some traders out of their short positions, adding to gains.
"The classic pre-refunding concession building ran out of steam and forced dealers to quickly reverse out of those short-positions," strategists with Action Economics LLC wrote in a note. The inversion between the 2- and 10- year notes, at 12 basis points, reached its widest level since late February. Five-year notes climbed 6/32 in price, their yield easing to 4.63 percent from 4.68 percent on Monday. Thirty-year notes were up 13/32 in price, their yields having eased to 4.76 percent versus 4.78 percent on Monday.

Copyright Reuters, 2006

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