Long-dated US government bonds rose on Monday as the outlook for manufacturing dimmed and three top investment banks said earnings came under pressure from the global credit crisis.
The Institute for Supply Management said US manufacturing expanded in September at its slowest pace since March, raising concerns that the sector will not be able to shore up the economy against the housing slump.
UBS, Credit Suisse and Citigroup acknowledged that the credit squeeze caused by the US mortgage mess took a toll on earnings, making safe-haven US government debt attractive as some investors sought protection from the widening fallout.
"We had good inflation data last week followed up with weaker numbers this morning from the ISM side. That combination should lead to a more calming effect in the long end of the bond market," said Bob Millikan, director of fixed-income at BB&T Asset Management in Raleigh, North Carolina. "More trouble at the investment banks is just going to help cause the economy to be a little softer for longer," he said. "We're not going to pull out of this in a month and say there was no impact from housing and subprime."
Benchmark 10-year notes rose 10/32 in price, pushing yields down 4 basis points to 4.55 percent. Five-year notes rose 3/32 to yield 4.23 percent. Bond yields move inversely to prices. The 30-year long bond surged 26/32 to yield 4.79 percent. Short-dated Treasuries, which benefit most from Fed rate cuts, struggled. Two-year notes slipped 2/32 to yield 4.02 percent.
Two-year notes have marched steadily higher since the Federal Reserve's aggressive September interest rate cut as the economic numbers pointed to continued weakness in housing and financial markets revealed only tentative signs of recovery.
Many analysts believe that as the ever-widening impact of the tightening of credit markets becomes apparent, investors will tend to favor the safety of fixed returns earned on Treasuries.
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