New worries that the most severe elements of Europe's debt crisis are in danger of spreading, including Portugal's first ratings downgrade to junk, rekindled US Treasuries' safe-haven appeal and ended a five-day selloff. Prices rose early on fears a plan by French banks to voluntarily roll over Greek debt would be considered a default.
They hit session highs late in US trading after Moody's Investors Service downgraded Portugal to Ba2 with a negative outlook from Baa1. It was Portugal's first downgrade into junk territory. "The Portugal downgrade clearly is negative because as the downgrades spread from the weakest to the weaker, the market is now asking, 'If Portugal is downgraded, will Spain be next?'" said Cary Leahy, economist and managing director at Decision Economics in New York.
Concerns over Chinese banks' creditworthiness and weaker US stocks also revived safety bids for Treasuries, pushing benchmark yields below their 200-day moving average on light, post-holiday volume after the US Independence Day holiday. "You would expect it to be a lot busier given the yield changes that we've seen," said Adam Brown, co-head of Treasury trading at Barclays Capital in New York.
Last week's crucial Greek parliament votes reduced anxiety over a sovereign default, but there are lingering worries whether the European Central Bank will still accept Greek government bonds as collateral as authorities and lenders scramble to design a second bailout package for the highly indebted eurozone country. While debt problems in Europe have grabbed much of the headlines, Moody's also cast an unflattering light on China's banking system.
China's local government debt may be 3.5 trillion yuan ($540 billion) above previous estimates, making Chinese banks vulnerable to deeper losses that could threaten their credit ratings, Moody's said on Tuesday. Nagging worries about Europe and the world economy will likely stem a further market sell-off after 10-year yields posted their biggest one-week jump in nearly two years last week, analysts and traders said.
The benchmark 10-year Treasury note was up 12/32 for a yield of 3.14 percent, down from 3.18 percent late on Friday. The 10-year yield touched a session low of 3.1173 percent. According to Tradeweb, the 200-day moving average for the 10-year yield is 3.1315 percent. Five-year Treasuries were up 13/32 with a 1.70 percent yield, down from 1.79 percent late Friday. The five-year yield pierced below 1.787 percent which is its 200-day moving average, and 1.72 percent which is the 50-percent Fibonacci retracement from the low yield in early November to the high yield in mid-February.