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TREASURIES-Bond yields flirt with record lows on weak data
July 16, 2012 / 4:08 PM / 5 years ago

TREASURIES-Bond yields flirt with record lows on weak data

* U.S. retail sales post surprise drop in June
    * Nagging worries about Europe feed safety bids
    * Eyes on Fed's Bernanke for clues on QE3
    * Five-year yield hits record low at 0.59 pct
    * U.S. Fed buys $1.84 bln in longer-dated bonds


    By Richard Leong
    NEW YORK, July 16 (Reuters) - U.S. government debt prices
rose on Monday, their yields flirting with historic lows, after
data showing a surprise drop in domestic consumer spending fed
bets a faltering economy would need more stimulus from the
Federal Reserve.
    While these rockbottom yields are not enticing, most
investors are simply too nervous about the global economy and
the financial contagion from Europe to take much risk, analysts
and traders said.
    "Treasuries at these low yields are not great trades. People
are just being forced into them," said Brian Edmonds, head of
interest rates at Cantor Fitzgerald in New York.
    Safe-haven demand for Treasuries was also supported by a
decision from Germany's high court to delay its ruling on
whether the euro zone's richest member can legally ratify
Europe's permanent bailout scheme and the pact for fiscal
discipline. 
    This drawn-out legal process fed worries about European
leaders' ability to manage their debt crisis, as borrowing costs
for Spain, Italy and other struggling members of the euro-bloc
hover at unsustainable levels.
    The main factor driving the market was a 0.5 percent fall in
U.S. retail sales in June, marking a third straight month of
decline. Economists had expected a 0.2 percent rise.
 
    This latest blight on the U.S. economy spurred bids for U.S.
Treasuries, sending their yields broadly lower albeit on
unusually light trading volume.
    Benchmark 10-year Treasury notes were trading up
14/32 in price at 102-25/32 for a yield of 1.445 percent, down
4.6 basis points from late on Friday.
    Earlier, the 10-year yield touched 1.442 percent, matching
the lowest level going back to the early 1800s last seen on June
1, according to data compiled by Reuters.
    In the short-run, Treasury yields could probe even lower as
further economic deterioration intensifies speculation the Fed
will soon embark on more bond purchases to stimulate the
economy, analysts said.
    "You got some pretty poor data. The market is anticipating
more quantitative easing," Cantor's Edmonds said. 
    The 30-year bond last traded 1-6/32 higher at
109-30/32 with a yield of 2.524 percent, 5.4 basis points lower
than Friday's close.
    The 30-year yield touched a session low of 2.520 percent,
within striking distance of a record low of 2.510 percent set on
June 1. 
    Among other maturities, the five-year yield hit a
record low of 0.5786 percent, while the two-year yield
 fell to 0.2219 percent, matching its lowest level
since Feb 1, according to Reuters data.
    A number of Fed officials recently seem to have laid the
groundwork of more action from the U.S. central bank, although a
few of them cautioned a third round of quantitative easing,
nicknamed QE3,  would be less effective than the previous
rounds.
    Traders will monitor Fed Chairman Ben Bernanke's testimonies
before two separate Congressional committees on Tuesday and
Wednesday. They will scour for signs on whether the Fed is
preparing for QE3 soon. 
    "Bernanke's testimony will be important for clues about QE3.
The Fed is not going to sit idly by," Cantor's Edmonds said.
    In the meantime, the Fed has been buying bonds in the open
market with its Operation Twist that involves selling its
short-term debt and buying longer-dated Treasuries.
    On Monday, the Fed bought $1.84 billion in U.S. government
debt that matures in Aug 2022 to Feb 2031.

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