US Treasury debt prices rose for a third straight day on Tuesday after data showing the first drop in housing starts since January cemented the view that the housing sector would remain a drag on the economy. Those signs of economic weakness dispelled bond investors' recent worries about the possibility of a Federal Reserve interest rate rise.
Benchmark bond yields slipped to their lowest levels in more than a week, with short maturity Treasury yields, which respond closely to prospects for official interest rate moves, all dipping below 5.0 percent.
"What is helping the Treasury market is this idea that housing is remaining a very big risk to the economy. The figures today in many eyes reinforce that," said Tony Crescenzi, chief bond market strategist with Miller, Tabak & Co in New York.
Government data showed housing starts fell 2.1 percent in May, roughly in line with expectations. "The housing figures support the idea of the Fed on hold on interest rates, while the bond market's fear has been of moving toward a hike," Crescenzi added.
In the aftermath of the housing data, interest-rate futures showed a roughly 20 percent perceived chance the Fed could cut interest rates by year end. The benchmark 10-year note rose 14/32 in price for a yield of 5.08 percent, compared with 5.14 percent late on Monday.
Since rising to a five-year peak above 5.30 percent last week, the 10-year note's yield has fallen more than 20 basis points over five sessions. "Essentially, the Treasury market had reached an oversold position. Housing data helped Treasury prices along a path they were already on," said Bob Calhoun, Evergreen Investments portfolio manager in Richmond, Virginia. "Real yields had risen to levels we hadn't seen in a number of years and put value back in the market we hadn't seen in a long time."
For now, the 10-year note's yield is trading in a range between 5 percent and 5.25 percent, analysts said. Mortgage-backed bond funds that had sold Treasuries to hedge their risks in last week's selloff were likely returning to the market to buy US government bonds, adding to the rally, analysts said.
The US housing industry has been in a slump for about a year now, with home prices falling after a five-year rally, house construction rates slowing, and foreclosures rising in the subprime mortgage sector. The recent rise in US Treasury yields to five-year highs could deepen the housing industry's problems, analysts said.
On Monday, the National Association of Home Builders said its housing market index fell in June to the lowest level since February 1991, the trough of the last housing cycle.
Dallas Fed economist John Duca cautioned that the housing slump could be prolonged by lenders cutting back loans to subprime or riskier borrowers, according to an interview posted on the bank's Web site, one factor adding to Treasuries gains, traders said.
Wall Street is also feeling the subprime mortgage sector squeeze. Two-year notes rose 4/32 in price for a yield of 4.94 percent, down from 5.00 percent late on Monday. Five-year Treasury notes traded up 8/32 in price to yield 5.00 percent, versus 5.06 percent late on Monday. The 30-year bond shot up 24/32 in price for a yield of 5.20 percent, versus 5.25 percent late on Monday.