U.S. government debt prices trimmed losses Friday after Standard & Poor's said it may downgrade some of the credit ratings of Fannie Mae and Freddie Mac, spurring a brief flurry of safe-haven bids.
S&P said it may lower the AA-minus ratings on Fannie Mae and Freddie Mac'ssubordinated debt and preferred stocks, on concerns about their ability to raise capital in the face of persistent the housing slump and rising loan losses and delinquencies.
But the debt rating agency affirmed the mortgage finance giants' vital "AAA" ratings on their senior unsecured debt.
A downgrade of their senior debt ratings could mean a huge spike in their borrowing costs, crimping their ability to buy mortgage loans in the secondary market.
The benchmark 10-year Treasury note's price was last down 24/32 to yield 4.09 percent, compared to 4.00 percent late Thursday. The S&P move briefly pared the price decline on the 10-year note to 21/32.
Treasurys fell earlier after better-than-expected data suggested resilience in some areas of the economy and fanned fears that the Federal Reserve might raise interest rates.
Although far from robust, the latest snapshots on durable goodsdemand, consumer sentiments and new home salessoothed some worries about growth stemming from prior day's weak readings on jobs and new home sales, analysts said.
"Today we did a back-flip. Today's data were a reversal of yesterday's numbers," said Colin Lundgren, head of institutional fixed-income at RiverSource Investments in Minneapolis.
Friday's less grim data, together with optimism about the federal housing rescue package and worries about rising interest rates and Treasury supply, boosted U.S. stock futures and pulled cash out of bonds, analysts said.
"So far bonds have reacted by strongly selling off," said Matthew Moore, economic strategist with Banc of America Securities in New York. "The housing bill is slowly passing through the Senate. All these things are detracting from the flight to quality trade today," he added.
Two-year debt traded 5/32 lower in price for a yield of 2.69 percent, up from 2.61 percent late Thursday.
U.S. rate futures implied traders see a bit more than a 50 percent chance of a September Fed rate hike.
Some Areas of Resilience
Friday's less grim economic readings unsettled bond bulls who have been betting on further weakness due to the housing slump and credit woes plaguing the financial sector.
New orders for long-lasting manufactured goods unexpectedly rose 0.8 percent in June versus a forecast 0.3 decrease. while Reuters/University of Michigan's index on consumer sentiments took a surprise upturn from a 28-year low set in June.
Moreover, new home sales fell by a less-than-forecast 0.6 percent in June.
Still, investors took the view that all is not well with the economy. The housing market has not exhibited any signs of bottoming, while the consumers remain in distress due to a worsening jobs market and high gasoline prices.
"At this point we think it is too soon to conclude that the housing market is beginning to stabilize, especially given the still very-elevated levels of home supply as well as the potential impact of foreclosure sales in the second half of the year," John Ryding and Conrad DeQuadros at RDQ Economics wrote in a research note.
U.S. home foreclosure filings increased 14 percentin the second quarter, climbing for the eighth consecutive quarter, RealtyTrac said early Friday.
Among other maturities, the yield on five-year Treasurys was 3.44 percent, equal to a high yield of 3.44 percent in the five-year note auctioned on Thursday.
The 30-year bond was trading 1-14/32 lower with its yield at 4.69 percent, up from 4.60 percent late Thursday.