US Treasuries rose on Monday, sending 10-year yields below 5 percent for the first time since early June, as global bonds rallied on security worries and shrugged off strong US factory data.
Traders said attempted car-bomb attacks in London on Friday, Saturday's attack on the airport in Glasgow, Scotland, and the killing of seven Spanish tourists and two Yemenis in a blast in Yemen kept a constant bid in the Treasury market.
A BBC television report that Britain's Stansted airport, near London, was on alert on Monday after a suspicious package had been found gave bonds their latest boost.
"Some people are talking about Stansted Airport in London being closed because of a suspicious package," said Michael Cheah, vice president, portfolio manager, at AIG SunAmerica Asset Management in Jersey City.
Treasuries maintained most of their gains even after Stansted re-opened as the incident heightened sentiment that possible similar episodes in the future might prove positive for bonds.
Benchmark 10-year notes were up 8/32 in price, pushing their yields down to 4.99 percent from 5.03 percent on Friday. Two-year notes rose 1/32 in price, yielding 4.86 percent. The 30-year long bond gained 16/32, yielding 5.09 percent. Treasuries were not alone in their gains but the latest dip in yields below 5 percent added momentum. Euro-zone and British government bonds also had a strong day.
"The European government bond market has had an unbelievable bid all day and that has to be terror related," said Tom Tucci, head Treasuries trader at RBC Capital Markets in New York.
Earlier, the Institute for Supply Management's manufacturing gauge unexpectedly rose to a 14-month high, giving bonds a brief knock lower as it provided fresh evidence that the factory sector was weathering a persistent slump in housing. ISM's manufacturing index rose to 56.0 in June from 55.0 in May, surpassing forecasts for no change.
Though the unexpectedly high reading sparked a brief dip in bonds, traders bid the market back up when the sell-off failed to gather momentum. Adding to support for bond prices, the report also delivered good news on inflation, with its prices-paid component easing.
Continued worries about how the fallout from the crisis in the subprime mortgage market could affect economic growth acted as a brake on any sell-off. Aside from the subprime fears, however, the drop in yields below 5 percent spurred expectations the Treasuries rally could gain further speed with the help of mortgage investors.
A swift drop in rates often leads investors to shift hedges on mortgage investments whose duration, or rate sensitivity, shortens with the falling yields. Investors often receive in swaps or buy Treasuries to offset expected losses from mortgage holdings if their duration falls, a move called convexity hedging. "Once we broke 5 percent, this opens up the possibility of convexity buying," said Cheah, at AIG SunAmerica Asset Management.
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