US Treasury debt prices surged on Thursday, with the yield of the 10-year note falling to a four-week low after Israel escalated its siege of Lebanon. The increased conflict in the Middle East sent investors to the relative safety of government bonds and out of more volatile asset markets.
"We are seeing continued buying of bonds as stocks get sold," said Andrew Brenner, head of fixed income at Investec US in New York. "The major money today is going into the short end as equities give back their 2006 gains." Treasury trading volume rose 22 percent above its 20-day moving average, according to bond broker ICAP.
The benchmark 10-year US Treasury note's price rose 7/32 in price for a yield of 5.08 percent, down from 5.11 percent late on Wednesday. The 2-year note rose 3/32 in price to yield 5.13 percent, down 5 basis points from late on Wednesday.
The news in the Middle East sent oil prices to a record high and pounded stocks.
Earlier, an auction of $9 billion of Treasury Inflation Protected Securities (TIPS) came broadly in line with expectations and did little to bond prices.
The US government also reported on Thursday that its budget surplus for June reached $20.47 billion on record outlays and tax receipts, below analysts' expectations of $21 billion.
Attracting attention on Friday will be a report on US retail sales and an expected move by Japan's central bank to increase interest rates for the first time in six years.
Analysts expect retail sales to have increased by 0.4 percent in June, compared with a rise of 0.1 percent in May. Investors will look to the retail sales report for signs of how much record-high energy prices and rising interest rates are affecting consumer spending.
In a speech on Thursday, Minneapolis Federal Reserve Bank President Gary H. Stern played down worries that US consumers are over-indebted, saying the financial position of US households was "reasonably satisfactory."
The Treasury Department auctioned $9 billion in 10-year Treasury Inflation Protected Securities (TIPS), an average figure for auctions of this type.
The proportion of the auction's indirect bidders, including foreign central banks, was 36 percent, a new low for 10-year TIPS. The previous low was 36.7 percent in January 2005. The low figure implied that indirect bidders thought the auction price was expensive, analysts said.
"It certainly wasn't a disaster. Indirect bidders were the weakest ever, so that was a little disappointing, but the auction (price) came right in where they were advertising it," said Mary Ann Hurley, vice president of fixed-income trading at D.A. Davidson & Co in Seattle.
The yield on 10-year TIPS was 2.51 percent, down 3 basis points from before the auction. The bid-to-cover ratio for the auction came in at 1.76, below the 1.80 average level for the three previous auctions of new issues. The jobless claims data did not change the market's view of slowing growth in the US job market, analysts said.
"This time of the year, the claims number is less reliable, given the auto shutdown," said James O'Sullivan, an economist at UBS Securities in Stamford, Connecticut. "I suspect that we will see an uptrend in claims after seeing some weaker payroll numbers." The 30-year bond was up 11/32, while its yield fell to 5.12 percent from 5.14 percent late on Wednesday.