US Treasury prices rose on Monday, pushing yields to the lowest since early October as political turmoil in Greece, an anti-austerity vote in Germany and concern of slower growth in China drove a bid for safety. Uncertainty over the impact of a potential Greek exit from the euro spurred the rush to safety, hurting riskier assets and helping US government debt.
Germany's political landscape appeared to be shifting as Chancellor Angela Merkel's conservative party was roundly defeated in an election in the country's most populous state. It was the latest vote in Europe to show austerity policies under attack. The weekend decision by China, the world's second-largest economy, to loosen monetary policy, essentially a pro-growth move, underscored fears the global economy was weakening.
Spain sold 2.9 billion euros ($3.8 billion) of short-term debt, but its borrowing costs rose to just under 3 percent, meaning it now pays twice as much for 12-month money as Germany pays for 10 years. The cost of insuring Spanish bonds against default hit an all-time high.
Spanish 10-year debt was trading with a yield above 6 percent, seen as unsustainable. Greek Socialist leader Evangelos Venizelos said on Monday he was not optimistic that a coalition government could be formed a week after an inconclusive election, but urged all parties participating in talks to work until a solution was reached.
President Karolos Papoulias has summoned all parties in parliament apart from the ultra right to a third day of talks on Tuesday. If Greek political leaders cannot agree on a coalition, a fresh election is likely next month. Opinion polls show the vote would favour anti-austerity, left-wing parties that do not plan to adhere to Greece's bailout conditions.
Any outcome that threatens the bailout deal makes a default and an exit from the euro more likely, potentially hurting holders of Greek sovereign debt, including the IMF, the European Union and the European Central Bank. "It is all about the safe-haven trade - the flight to safety and the rush from fear," said David Dietze, investment strategist at Point View Wealth Management in Summit, New Jersey.
Safety buying of US government debt pushed yields lower, with benchmark 10-year notes rising 15/32 in price to yield 1.79 percent, down from 1.85 percent late on Friday. As of Friday, US yields had fallen for eight consecutive weeks. "The same danger signs that have been flashing for more than six months are flashing red again right now, so people are piling into Treasuries even at yields where it's hard to see value except that they look better than the alternatives," said Michael Cloherty, head of US rates strategy at RBC Capital Markets in New York.
Although Treasury yields are at their lowest since October, he said Tuesday's report on April US consumer prices could push yields down even further. "We do think tomorrow's CPI report matters because we think the headline print will be negative," said Cloherty. Economists polled by Reuters expect the headline CPI to be flat, and up 0.2 percent with food and energy items excluded.
"That only matters because the constraint to more QE3 right now is that the CPI headline number is well above the Fed's 2 percent target," said Cloherty, referring to a third round of so-called quantitative easing from the central bank. Thirty-year Treasury bonds traded 1-10/32 higher in price to yield 2.95 percent, down from 3.02 percent late Friday.