Prices of most US Treasuries held steady on Monday. But investors sold 30-year bonds amid concerns over the US deficit and lawmakers' inability to raise the federal debt ceiling. The sell-off in 30-year bonds, the riskiest US debt, created the biggest differential between short- and very long-term yields in two weeks.
Five-year Treasury notes, for instance, yielded just 1.44 percent, in part reflecting investors' expectations for low inflation over that time frame. In contrast, the 30-year bond yielded 4.30 percent, the higher yield offered as a premium to investors taking a longer-term and therefore higher risk.
The concession on the price of the 30-year bond reflected the view that a $1.5 trillion federal deficit cut would leave some longer-term fiscal issues unresolved, said RBS Securities Treasury strategist John Briggs in Stamford, Connecticut.
The price of the bond came down and the yield it offered rose to compensate investors for the risk posed by longer-term fiscal problems, Briggs said.
Bonds attracted some buyers early in the session as uncertainty over how Europe would tackle its debt crisis made US Treasuries look attractive, relatively speaking. But by the end of the day, the benchmark 10-year note had slipped 3/32 of a point, its yield rising to 2.92 percent from 2.91 percent late on Friday.
The Treasury market has been relatively sanguine about the prospect of a US debt default. Most investors believe an agreement will be reached to raise the debt ceiling.
"For the US it's more of a relatively short term political issue," said Jim Golden, head of Treasury trading at Jefferies & Co in New York. "I don't think anybody realistically expects the US to default."
"There is a significant amount of uncertainty in Europe right now. That's the major theme; the question is whether the problems can be resolved effectively or quickly," Golden said. The cost of insuring US debt in credit default swaps trade fell on Monday to 53 basis points, or $53,000 per year to insure $10 million in debt for five years, according to data from Markit.
The spread on US 30-year interest rate swap rates over the 30-year Treasury bond also reached its widest levels in eight months as some pension funds moved out of Treasuries and into swaps as a proxy for long Treasuries exposure, traders said.
The swaps last week rose to 56 basis points, their highest levels since February 2010, reflecting some rising concern that the US could risk default. Fitch Ratings also said on Monday it may put the US on watch for downgrade from its top rating if no agreement to raise the ceiling is made.