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Bonds Rise as Bleak Housing Turns Bleaker

Reuters
Tuesday, 2 Oct 2007 | 12:16 PM ET

U.S. Treasurys edged up on Tuesday after data showing pending homes sales fell three times more than forecast, blunting hopes for a swift end to a two-month lending crisis in financial markets.

The figures yanked stocks off record highs, renewing the impetus to delve into safer assets like bonds.

Investors worry that a deeper housing slump will hit banks even harder, thereby preventing them from making new loans and accentuating the problems that have plagued the global financial system since the start of August.

August's hefty 6.5 percent retrenchment in sales compounded a two-year slide that some describe as one of the worst housing slumps on record.

"The housing recession continues," said Jim O' Sullivan, economist at UBS.

As the rally in equities faltered, benchmark 10-year notes rose 3/32 for a yield of 4.54 percent, down one basis point on the day.

The market has become callous to the housing market decline, with analysts saying it will take an ever increasing amount of bad news on housing to power government bonds any further, since these safe-haven assets had already priced in a continued worsening of conditions.

Investors might get an update of Federal Reserve officials' thoughts on housing later in the session, when Dallas Federal Reserve President Richard Fisher gives a speech in Texas.

While the remarks are supposed to focus on technology, question-and-answer sessions may provide ample opportunity for comments on the economy and monetary policy.

Taking a longer view, dealers also reported adjusting positions ahead of Friday's employment report. Some fear a rebound in hiring following last month's surprise contraction could redouble a fledgling willingness to reembrace risk, to the detriment of government debt.

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