US Treasuries rallied on Friday as warnings that Standard & Poor's would downgrade eurozone sovereign debt ratings fed a bid for safe-haven US government debt. French Finance Minister Francois Baroin said the ratings agency had alerted most euro-zone countries of downgrades and France would have its top AAA rating cut by one notch.
"S&P is known for doing Friday downgrades and markets are fearful of that," said Rob Robis, head of fixed-income macro strategies at ING Investment Management in Atlanta, Georgia. Benchmark 10-year Treasury notes rose half a point, their yields easing to 1.87 percent from 1.92 percent on Thursday. Thirty-year bonds rose more than a point, their yields falling to 2.91 percent from 2.97 percent on Thursday.
Ironically, the S&P ratings downgrades would occur after Italy and Spain drew solid demand at debt auctions on Thursday, easing fears of a regional credit freeze. "But ratings positions lag the news so the debt downgrade would be in response to the problems we saw in peripheral Europe at the end of last year," Robis said. Stocks' losses, led by banks, reinforced the safety bid for bonds. But the main inspiration for the flight-to-safety bid for Treasuries was the talk of euro-zone debt downgrades, said Jim Kochan, chief fixed-income strategist at Wells Fargo Advantage Funds, with $219.9 billion in assets under management, in Menomonee Falls, Wisconsin.
That the good demand for the debt auctions in Italy and Spain on Thursday was followed by a rush back into safe-haven Treasuries on Friday showed there is still a lot of apprehension about the outlook for Europe, Kochan said. "The European situation is far from settled and has the potential to disrupt things, and that disruption means people will buy Treasuries," he said. Looking ahead, the bond market will digest data on industrial production, home sales and producer and consumer prices next week.
The December price indices are expected to be fairly subdued and friendly toward the bond market since inflation is anathema to fixed-income investments. That would leave the door open for the Federal Reserve to undertake more quantitative easing should it feel that the state of the economy, particularly the housing sector, warrants it.
In general, as a result of strong foreign demand for Treasuries and the Federal Reserve's large purchases aimed at facilitating economic growth, investors have done well buying US debt. "There's not a lot of buyer resistance, no matter how expensive they are," Kochan said.