US Treasury debt prices rose on Thursday, reversing re plaguing the US economy. The surprisingly weak data sparked investors to shun stocks and other risky assets and favour safer investments like Treasuries, analysts said.
Data early on Thursday showed UK retail sales slumped in June at the sharpest rate on record and Ifo economic research institute's index of German corporate sentiment falling to its lowest since September 2005. This reinforced the perception that US economic woes are spreading through the rest of the world.
"We are reacting to the economic data. When equities fall, bonds rise," said Mark Simenstad, head of fixed income funds at Thrivent Financial in Minneapolis. The Dow Jones Industrial average tumbled more than 280 points or 2.4 percent, prompted by fears that a persistent housing slump will result in more losses and write-downs for banks, hurting the rest of the economy.
The reversal in the stock market, which had been buoyant this week on hopes of the passage of a housing rescue bill, pushed Treasury yields from near one-month highs set on Wednesday. Benchmark 10-year Treasury notes traded 27/32 higher in price at 98-28/32. The yield, which moves inversely to the price, was 4.01 percent, down from 4.12 percent late on Wednesday.
Two-year note yields traded at 2.63 percent from a high yield of 2.82 percent in an auction of the notes on Wednesday. Investors' stampede into low-risk bonds on Thursday overshadowed their thirst for yield, analysts said. The US Treasury sold $21 billion in five-year notes with solid demand after a record $31 billion auction of two-year debt on Wednesday. The strong five-year sale added to the day's bullish tone for Treasuries.
But Treasuries have little investment value with inflation running above their yields, Thrivent's Simenstad said. "Inflation is higher than anything along the curve right now," he said. Appetite for US government debt will be tested in the coming days with Treasury's August refunding.
Merrill Lynch economists predicted the Treasury will sell $15 billion in 10-year notes and $9 billion in 30-year bonds, as a part of its refunding. They said in a research note on Thursday it may bring back the three-year note after it stopped issuing the maturity just a year ago.
The Treasury is scheduled announce its August refunding plan on July 30. Among other maturities, five-year notes were up 23/32 in price for a yield of 3.34 percent, down from 3.50 percent late Wednesday, while the 30-year bond gained over 1 point for a yield of 4.61 percent, down from 4.68 percent late on Wednesday.