U.S. Treasuries shot up on Tuesday, pushing the benchmark 10-year yield to a 4-1/2-year low after a dramatic sell-off in stock markets around the world carried over into Asia on escalating fears that the U.S. economy is heading for a recession.
Such concerns sparked more buying in safe-haven government bonds, lifting Treasury futures to their highest since mid-2003 as the drop in equities cemented the view that the Federal Reserve will cut interest rates by at least 50 basis points next week.
Analysts said panic selling in stocks, which drove some Asian share markets more than 5 percent lower on Tuesday, was the catalyst for Treasury gains as investors expect the Fed to slash rates aggressively from 4.25 percent next week.
"Given the drop in stocks, the market is expecting a decisive move from the Fed next week," said Yasutoshi Nagai, chief economist for Daiwa Securities SMBC's economic research group. "The main scenario is for a 50-basis-point cut and a statement suggesting more to come."
Ten-year notes were up 26/32 in price to yield 3.541 percent versus 3.632 percent late on Friday. Earlier in the day the yield tumbled to 3.499 percent, its lowest since around July 2003. The 10-year yield has tumbled around 50 basis points since the start of the year.
Along with regional stocks, Treasuries took a cue from a drop in U.S. shares. S&P 500 futures were down 4.7 percent in Asia, holding losses after tumbling to a 17-month low during a shortened session on Monday, when other U.S. markets were closed for a national holiday.
Two-year notes were up 11/32 in price to yield 2.169 percent, not far from 2.154 percent touched earlier in the day to mark its lowest in nearly four years. The two-year yield was down sharply from 2.359 percent late last week.
Tuesday's moves expanded the 10-year/two-year spread to around 137 basis points, its widest since late 2004, and steepened the yield curve as yields on shorter-dated debt have tumbled more than longer maturities in the market's rally in the past month.
Treasury futures jumped more than a full point to hit 117-23.5/32, the highest since mid-2003. At 0245 GMT, they were up 25.5/32 at 117-15/32.
Market participants said yields may fall further if U.S. investors continue to dump equities when they return to the market later in the day, but some added that the pace of Treasury gains could slow, given that bonds have become difficult to buy due to such low yields.