US government debt prices jumped on Monday as worries about a deepening recession and a shaky financial sector made investors favour low-risk assets over stocks, sending Wall Street to 12-year lows. The benchmark 10-year Treasury note's yield, which moves inversely to its price, fell below the pivotal 3 percent mark.
But it was still about 90 basis points above its five-decade low of 2.04 percent hit during investors' panicked scramble into government securities in mid-December. In the stock market, financial shares led the broader market lower after insurer AIG reported a $61.7 billion quarterly loss, the biggest in US corporate history, and reached a new bailout deal with the government. The sell-off pushed the S&P 500 index below the 700 level for the first time since October 1996.
"This is a risk aversion day," said Richard Schlanger, portfolio manager at Pioneer Investments USA in Boston. "Treasuries were getting a bid on the AIG news and the weakness in equities." Treasuries kicked off March strongly after a dismal February when they succumbed to concerns about the US government's long-term credit-worthiness. Some analysts and traders have questioned the massive federal borrowing enacted to end the recession and shore up battered banks.
The growing burden from various government bailout programs has driven up the cost to insure Treasuries in the credit default swap market. The risk premium on 5-year Treasury CDS rose to 94.2 basis points midmarket from 91.2 basis points late Friday, according to credit data firm CMA DataVision. The spread is not far from the record 100 basis points touched on February 24.
In addition to the stock sell-off, investors' rush into Treasuries was spurred by another wave of grim economic data, reinforcing the notion the Federal Reserve will leave interest rates low at least into year-end. Monday's data showed a contracting manufacturing sector and falling construction spending.
The US Institute for Supply Management's manufacturing reading for February was 35.8, above economists' median forecast for 33.8, but still markedly in contraction, denoted by a reading below 50.
"We have seen production deteriorating at rapid rate. I wouldn't read any positive news in today's report. This is still a low reading in recession levels. It's still painting a gloomy picture," said Anna Piretti, senior economist with BNP Paribas in New York. A government report did show surprise increases in consumer spending and income in January, but most economists downplayed those gains as a result of special factors.
The 2-year Treasury note's price was up 5/32 for a yield of 0.90 percent, versus 0.98 percent late Friday. Three-month Treasury bill yields dipped to 0.25 percent, near the lowest levels in a month, as investors continued to take refuge in ultra short-dated government securities. The Treasury Department is scheduled to sell $159 billion in regular and cash management bills this week.
Comments
Comments are closed.