US Treasury debt prices jumped on Friday as fears over a full-fledged bailout for Spain drove a safety bid for government bonds, nudging their yields near historic lows. Spain's heavily indebted eastern region of Valencia on Friday said it would apply to Madrid for aid, complicating central government efforts to avoid a massive rescue deal.
The country also cut its economic outlook on Friday, indicating the government expects the economy to remain in recession through 2013 and rating agency Egan-Jones cut Spain's credit rating further into junk status, citing the weakening economy including crumbling finances among the country's regions. "Spain is faltering. There is no cohesive strategy," said Scott Graham, head of US government bond trading at BMO Capital Markets, in Chicago.
Greece, which agreed to a second bailout earlier this year, added to worries after a member of Germany's coalition government was quoted as saying that euro zone countries should comply with agreed reforms or leave the currency bloc. The European Central Bank said on Friday Greek government bonds will be ineligible for banks to use as collateral to borrow from the ECB from July 25.
The worries over the situation in Europe sparked selling of the euro and selling in Spanish and Italian debt, which in turn caused a wave of buying in Treasuries, German Bunds and other low-risk assets. "The economic data continue to disappoint," said Thomas Roth, executive director of US government bond trading at Mitsubishi UFJ Securities USA in New York.
Fed Chairman Ben Bernanke acknowledged the deceleration in economic growth at his semiannual testimony before Congress this week. He said the US central bank is prepared to act if the economy deteriorates further but was short on details. Speculation on a possible cut in the interest rate on excess reserves has pushed the two-year Treasury yield to its lowest level since late January. The two-year note yield fell 20 basis points on Friday, the lowest level since September and down around 4 basis points on the week. Analysts and traders noted a drop in trading volume from Thursday and the moves so far were driven by program trades.
Benchmark 10-year notes rose 16/32 in price to yield 1.458 percent, down 5 basis points from late on Thursday and within striking distance of a historic low of 1.44 percent set on June 1. The 30-year bond was rose 1-22/32 in price, yielding 2.541 percent, down 7 basis points from Thursday's close and only 3 basis points above its record low. The 30-year yield is on track to decline for a fourth straight week. That would match a streak last seen in August 2011.
Meanwhile, the Fed sold $7.93 billion in Treasuries that mature in September 2014 to April 2015. The sale, part of its Operation Twist, is intended to lower mortgage rates and other long-term borrowing costs in an effort to stimulate borrowing and investments. Investors are bracing for more supply next week when the Treasury Department will sell $99 billion in coupon-bearing securities, starting with a $35 billion auction of two-year notes on Tuesday.
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