US Treasury prices climbed on Monday as rising Iran tensions and a comment from ex-Federal Reserve Chairman Alan Greenspan that a recession is possible added to safe-haven flows from subprime mortgage market woes.
The price gains pushed benchmark bond yields to seven-week lows as US government bonds drew bidding from a perception that credit problems could be spreading in the subprime market.
That sector comprises riskier mortgage deals, some of which have gone awry in the housing market downturn, and investors have been turning to government debt as a safer alternative to the subprime market.
"We have follow-through from Friday, when we had the market start to price a credit event coming from the subprime mortgage market. So, I think some of the bid was flight-to-quality driven," said Nicolas Beckmann, co-head of dollar interest rate trading at BNP Paribas in New York. Beckmann also said Treasuries had received support from the euro zone government debt market, which posted strong gains on Monday.
"The last reason is Greenspan being quoted saying that there is a possibility of a recession this year, at the end of '07, because of the housing market not rebounding as expected. So all of that is why we're trading up," Beckmann added.
Benchmark 10-year notes were trading up 10/32 in price for a yield of 4.63 percent, down from 4.67 percent late on Friday. Benchmark yields touched their lowest since January 5. The market also benefited as investors sought a safe haven in fixed-income assets because of rising tensions between the United States and Iran over Iran's nuclear development program.
"Some of the Iran talk certainly does drive the market," said Andrew Richman, managing director with SunTrust's personal Asset Management division, based in West Palm Beach, Florida. Two-year notes which respond closely to expectations for Federal Reserve interest rate moves - rose 2/32 in price to yield 4.77 percent, compared with 4.81 percent on Friday.
World powers agreed on Monday to work on a new UN Security Council resolution to put pressure on Iran over its nuclear program but remained committed to seeking a negotiated solution, British officials said. Some dealers said the move higher in bond prices also came as the market braced for soft data later this week, including figures on fourth-quarter gross domestic product growth, which analysts expect to be revised lower on Wednesday.
"I think that what we're seeing here is we're just holding on and people are a little bit afraid to sell versus activity that is impending," said David Ader, Treasury market strategist at RBS Greenwich Capital. "I believe it's just about waiting for some other things to transpire," he added.
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