US Treasury debt prices rose strongly on Monday, pushing yields to three-month lows as credit jitters and a severe stock market tumble sent investors rushing to the safe haven of the bond market. The benchmark 10-year Treasury note yield fell as low as 3.77 percent, its lowest level since May 13.
An early safety bid that reflected higher bond markets in Asia and Europe overnight picked up momentum as major US equity indexes tumbled, eventually losing about 2 percent. "Credit concerns once again drove market sentiment," said Ralph Manigat, analyst at 4CAST Ltd in New York.
Ten-year Treasuries were trading 22/32 higher in price for a yield of 3.78 percent against 3.87 percent late on Friday. The benchmark yield seems to be moving in a 3.75 percent to 3.90 percent near-term range, subject to swings in the stock market, technicians said. Two-year Treasury notes were 6/32 higher in price for a yield of 2.32 percent, down from 2.42 percent.
A bank holiday in the United Kingdom made for relatively light trading, but worries continued about rising spreads between the London Interbank Offered Rate and the federal funds rate, and negative implications for the credit market. "Rising interbank borrowing costs and worries over quarter-end and year-end funding are adding to market jitters over the financial system in general," said strategists at Action Economics.
A flurry of news fuelled credit market worries, including the failure of Columbian Bank and Trust in Kansas, the ninth US bank to fail this year, and the purchase on Monday of the ailing Roskilde Bank by Denmark's central bank.
Monday's existing home sales report for July showed sales slightly above expectations but rising inventories, falling prices and a jump in foreclosure sales suggested the housing market is still in a slump. Short-term interest rate futures rallied, pushing down the implied chances for Federal Reserve rate hikes.
Prospects for a rate increase by December fell to 32 percent from 46 percent. Futures suggest the first rate hike could come in the second quarter of 2009. Markets brushed off a remark from Philadelphia Fed President Charles Plosser that rates need to be raised sooner rather than later or face rising inflation.
Market-based inflation ideas have already tumbled over the past few weeks, responding to lower commodity prices and assessments that weak economic growth will open up more slack in the US labour and goods markets.
On Monday, the Chicago Fed's national activity index, which measures the performance of 85 separate indicators, fell to -0.67 in July from -0.59, adding to concerns that growth will falter in the third quarter now that the impact of the government stimulus program has been played out. The spread between 10-year Treasury inflation protected securities and conventional Treasury yields fell to 2.16 percent, not far from its multi-year low from a week ago.
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