US Treasuries rallied on Monday as anxiety over Ireland's finances fuelled a safe-haven bid and partly helped demand for $36 billion worth of new two-year government debt. The market rally was led by long-dated maturities, as traders piled on bets the Federal Reserve will soon buy more Treasuries in a bid to stimulate spending and investments, analysts said.
US and German government bonds rallied as Irish debt succumbed to increased worries over the ultimate cost to the Irish government and the European Central Bank in dealing with Anglo Irish Bank. Moody's downgraded the struggling lender's debt ratings due to growing default risk. Investors demanded higher compensation to hold Irish sovereign debt.
Speculation Japan will reinvest the $20 billion to $22 billion in American currency it purchased during its intervention two weeks ago at this week's Treasury auctions also lifted bond prices. The Treasury sold the latest two-year issue due September 2012 at a record low yield of 0.441 percent. The bid-to-cover ratio, which is a gauge of overall demand, came in at 3.78, one of the strongest readings on record, according to US Treasury data.
The Treasury plans to sell $35 billion in five-year notes on Tuesday and $29 billion in seven-year notes on Wednesday. The benchmark 10-year Treasury note was up 26/32 in price for a yield of 2.52 percent, down from 2.61 percent late on Friday. It tested support at its 30-day moving average in the 2.62 percent area for a second session.
The 30-year bond was up 1-22/32 points with its yield falling to 3.70 percent from 3.79 percent on Friday. The long-end rally flattened the yield curve to levels not seen since the start of the month, reflecting traders scaled-back expectations on US growth and inflation. The gap between two-year and 10-year yields shrunk to 210 basis points from 216 basis points late on Friday. Bond yields, after Monday's decline, returned to the lower end of this month's trading range, as bets on a second round of Fed quantitative easing or "QE 2," have been mitigated by the recent batch of less dismal economic data.
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