Treasuries climb

US Treasuries prices rose on Tuesday as US stock market declines renewed the safe-haven bid for bonds despite nagging worries over a possible US default that could slam the value of government debt. Fears the government will run out of cash by August 2 if lawmakers do not reach agreement in debt talks actually bolstered Treasuries as investors still looked at US government debt as one of the lowest-risk investments out there.
"There was some concern that an increased probability of a default or downgrade would turn investors away, but it appears that in a perverse sense, Treasuries have become a form of insurance against their own downgrade," said Thomas Simons, money market economist with Jefferies & Co in New York.
The looming deadline to raise the debt ceiling has fuelled anxiety about appetite for this week's $99 billion worth of new debt supply. Those fears remained even after the sale of $35 billion of two-year notes on Tuesday afternoon was met with relatively solid demand.
"We'll see if longer duration debt performs as well. We have our doubts unless markets get more clarity on the debt ceiling before tomorrow," said William O'Donnell, head of US Treasury strategy at RBS Securities in Stamford, Connecticut. The Treasury will sell $35 billion of five-year notes on Wednesday and $29 billion of seven-year notes on Thursday. Lawmakers are trying to reach a deal to raise the $14.3 trillion US debt limit and avoid a default but many on Wall Street worry that the United States could lose its top-notch credit rating even if a default is averted.
The benchmark 10-year Treasury note traded 12/32 higher in price on Tuesday to yield 2.96 percent, down from 3.00 percent late Monday, while the 30-year bond traded 20/32 higher to yield 4.28 percent from 4.31 percent. Europe's persistent debt problems and signs of slowing US economic growth have stemmed any sustained selling in Treasuries, capping a rise on bond yields, analysts said.
A downgrade of the United States' AAA credit rating to AA could add 60 to 70 basis points to Treasury yields over time, members of the Securities Industry and Financial Markets Association said in a conference call on Tuesday. A small majority of economists believe the US will lose its top-notch AAA credit rating from at least one major rating agency, according to a Reuters poll that also found wrangling over the debt ceiling has already damaged the economy.