US Treasury debt prices rose on Monday as strains in the subprime mortgage industry heightened demand for US government bonds, which carry lower risk than other fixed-income securities.
Uncertainty over the fallout from rising loan defaults and home foreclosures offset Friday's US jobs data, which had shown the economy was expanding at a moderate clip, analysts said. Federal Reserve officials have said problems in the subprime mortgage sector, which involve riskier borrowers, have not shown signs of spreading to the broader economy. This view suggests to economists the Fed is unlikely to cut interest rates soon to bolster economic growth.
Still, the Fed's assessment has not quelled investors' discomfort about the growing subprime problem, which took center stage for investors on a light day for US economic data. "There is nothing on the economic side other than concern about subprime and a flight-to-quality causing Treasuries to rally," said Mario DeRose, fixed-income strategist with Edward Jones in St. Louis.
New Century Financial Corp, one of the largest US subprime lenders, said on Monday it received letters from creditors that plan to cut off financing to the company, a move that could push it closer to bankruptcy. "The New Century headlines made some contribution to the more bullish tone of the Treasury market," said Jane Caron, chief economic strategist with Dwight Asset Management in Burlington, Vermont.
Countrywide Financial Corp, the biggest US mortgage company, said its subprime exposure may result in earnings volatility. While lenders cope with their subprime struggle, traders prefer the safety of low-risk government securities rather than stocks and other higher-risk investments. US government bonds tapped such a safe haven bid on Monday, analysts said.
Benchmark 10-year US Treasury notes were up 8/32 in price to yield 4.56 percent, versus 4.59 percent late Friday, after rising 9 basis points last week. Bond prices and yields move inversely. Following a dearth of major economic data on Monday, several key reports will be released later this week: retail sales on Tuesday, producer prices on Thursday and consumer prices on Friday.
If these reports on consumer spending and inflation come within expectations, they will likely reinforce the perception of steady economic growth and mild inflation.
Economists' median forecast in a Reuters poll is for both overall retail sales, and sales excluding autos, to have risen 0.3 percent in February. Two-year Treasury notes were up 2/32 to yield 4.64 percent, versus 4.68 percent late on Friday. Thirty-year bonds were up 10/32 for a yield of 4.70 percent, versus 4.72 percent on Friday.
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