Long-dated US Treasury debt prices jumped on Monday with 30-year yields nearing a 16-month low as investors scrambled to lock in yields amid worries that deflation will choke off the economic recovery. Evidence of slowing consumer spending and business activity has fanned fears that the economy might be on the cusp of a falling price spiral that crushes growth and interest rates.
In a bid to avert this threat, the Federal Reserve has reinstated its purchases of Treasuries, a move it last made 9-1/2 months ago. Hedge funds and speculative traders have led the charge in buying long-dated debt during this four-day-long bond rally, betting that yields will fall in a deflationary climate. The latest burst of buying sent benchmark 10-year Treasury yields to 2.57 percent - the lowest since March 20, 2009, when it hit 2.56 percent intraday - according to Reuters data.
The spread between two- and 10-year yields, which have shrunken with the market's fears of deflation, narrowed to 208 basis points - the narrowest margin since late April 2009. The price on the 30-year bond, the longest government debt maturity, climbed about 2-1/2 points for a yield of 3.73 percent, the lowest level in about 16 months. The 30-year yield was poised for its biggest one-day drop since early June. The ravenous market appetite for long-dated assets spread across the fixed-income asset spectrum.
In the derivatives market, the CBOT 30-year T-note futures rose to contract highs, while the discount on 30-year interest rate swap rate fell to 3.27 percent, the lowest since early April 2009, according to Reuters data.
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