Bonds

Long-Dated Bonds Gain as Stock Market Weakens

Reuters
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Long-dated US government bonds rose Tuesday, as a weaker stock market revived some of the allure of safe-haven Treasurys.

The gains were limited by an unexpectedly mild slide in March home sales, which added to doubts that the Federal Reserve would continue cutting interest rates aggressively.

The news weighed on shorter dated Treasurys and heavy slate of government bond auctions added to the pressure.

Prices on two-year notes, which usually gain when the Fed cuts rates, fell 2/32, pushing the yield up to 2.20 percent from 2.17 percent late on Monday.

Longer-dated bonds, however, were bolstered by losses on Wall Street, helping them reverse a recent selloff.

"The stock market is up against a little bit of a ceiling here. Bonds are reacting accordingly," said Carley Garner, senior analyst at Alaron Trading in Las Vegas.

However, she said Treasury trade was thin and prices had appeared to be due for a bounce after the bond market's selloff in recent sessions.

Investors had been shedding bonds as they dipped their toes into riskier markets, including equities, to test the notion that the worst of the credit crisis was over.

Major US stock indices ended up more than 4 percent last week, and they closed near the break-even point Monday. On Tuesday they fell as US crude oil prices surged to a recordhigh, compounding fears about the toll of higher energy costs on the economy, company profits and household spending.

On Tuesday, the benchmark 10-year note gained 5/32 in price, lowering the yield to 3.71 percent from Monday's 3.73 percent.

The pace of existing home sales in the US fell 2 percent in March to an annual rate of 4.93 million units, the National Association of Realtors said.

The data indicated that the housing market continues to struggle, but it was better than economists' expectations.

Hawkish comments from the other side of the Atlantic provided further resistance at the front end, with European Central Bank policy-makers saying the ECB is prepared to raise interest rates if needed to bring inflation under control.

The setback this dealt to euro zone government bonds spilled over to Treasurys.

"We continue to see hawkish comments out of the ECB," said Rupert. "European bonds are a little bit heavy and that is spilling over to some extent."

Thirty-year bonds rose 18/32 on the day to yield 4.46 percent. Five-year notes fell 3/32, yielding 2.96 percent.

Rupert said upcoming supply of government bonds was also weighing on the short end of the market, with an auction of 5-year inflation protected securities later on Tuesday, followed by conventional two-year notes on Wednesday and five-year paper on Thursday.