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Bonds Gain on Housing Glut, Weaker Stocks

U.S. Treasury debt prices rose slightly Monday after data showing inventories of unsold single-family homes in July rose to their highest level in over 15 years, which spurred further selling in the stock market.

Bond price gains, however, were limited, analysts said, because the homes sales data from last month did not shed much light on the current state of the credit market, which has been roiled as financial companies have had difficulty accessing credit due to problems that began in the subprime mortgage sector.

Some support for bonds also emerged from remarks by the head of the European Central Bank on Monday, whose comments were interpreted as perhaps backing away from a rate hike.

Treasury trade volume was particularly thin due to a market holiday in London and with many U.S. players out on summer vacation.

Data showed the pace of U.S. existing home sales slipped in July to a 5.75 million unit annual rate, which was just above analysts expectations, but the supply of unsold single-family homes reached its highest level since 1991.

Stocks extended losses following the data, while the Treasury market made slight gains.

"This shows that the housing downturn continues to intensify. It shows no sign of abating. Given the turmoil in the financial market from lending problems, the housing problem will continue in the months ahead," said Mark Zandi, chief economist at Moody's Economy.com in West Chester, Pennsylvania.

Benchmark 10-year Treasury notes were trading 3/32 higher in price for a yield of 4.60 percent from 4.61 percent late Friday, while the two-year note was flat in price for a yield of 4.29 percent.

ECB President Jean-Claude Trichet said Monday that his last comments on interest rates on Aug. 2 came before the current period of credit market turbulence. In his earlier comments, Trichet used language that analysts said was indicative that the ECB would raise rates at its September policy meeting.

"Potentially, some people are reading (Trichet's) comments as maybe backing away from rate hikes," said Adam Brown, co-head of U.S. Treasury trading at Barclays Capital in New York.

The 5-year Treasury note was trading 2/32 higher in price for a yield of 4.40 percent from 4.41 percent late Friday, while the 30-year bond was 9/32 higher in price for a yield of 4.87 percent.

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