By Dow Jones Business News, October 03, 2013, 04:18:00 PM EDT
By Min Zeng
Investors sought safety in U.S. Treasury bonds Thursday as a disappointing report on the U.S. service industry added
to anxiety over the economic outlook that has been tainted by the ongoing fiscal gridlock.
Bond prices extended gains into a second-straight session as U.S. stocks fell. The flight-to-safety buying sent the
benchmark 10-year note's yield to the lowest level in nearly two months.
In late-afternoon trade, the benchmark 10-year note was 5/32 higher in price, yielding 2.606%, according to Tradeweb.
Bond prices move inversely to their yields.
The yield touched 2.579% during Thursday's trade, the lowest level since 2.55% on Aug. 12.
"The markets are waiting on Washington as there doesn't seem to be a deal in the near future," said Tom di Galoma, co-
head of fixed-income rates trading in New York at ED & F Man Capital Markets. "The economy will slow further," he said,
given the continued fiscal impasse in D.C.
Mr. di Galoma said the 10-year yield could fall to 2.5% at some point next week.
A boost for bond prices came from the September reading of the Institute for Supply Management's nonmanufacturing
index, which fell to 54.4 from 58.6 in August. Economists had expected a reading of 57.
The data came as investors worry about the potential impact of the ongoing fiscal gridlock on the U.S. economy. The
federal government was shut down for the third day and lawmakers face the deadline of Oct. 17 to lift the nation's $16.7
trillion debt ceiling.
Failure to increase the borrowing limit could lead to the first-ever default by the U.S., though many investors say
such a scenario remains remote.
Normally when concerns rise on the credit risk of a country, their sovereign debt should have sold off. But the
Treasury debt market has been an exception to the rule thanks to its status as the world's go-to safe harbor market over
the past decades. There are few, if any, debt markets in the world that can match the depth and liquidity of the $11.6
trillion Treasury bond market.
Treasury bonds rallied back in the late summer of 2011 when similar fiscal gridlock gripped investors. The
brinkmanship that led to a last-minute deal pushed Standard & Poor's Ratings Services to strip the U.S. of its top-
prized AAA rating on Aug. 5, 2011. The downgrade drove a broad selloff in riskier assets, fueling strong haven flow into
Now investors again have been tapping the Treasury market to preserve capital amid uncertainty over when a fiscal
accord could be reached to stop the partial shutdown of the federal government. Analysts warned that the longer the
shutdown, the bigger the effect on consumer and business sentiments.
Traders cautioned that bond yields would rise if a fiscal deal emerges by the Oct. 17 deadline.
The fiscal gridlock was one of the reasons the Federal Reserve refrained from trimming its $85 billion-a-month bond-
buying programs last month. The Fed's action has soothed investors' concerns over rising interest rates and accelerated
the bond market's recovery from its summer selloff.
The 10-year yield has dropped significantly after briefly crossing the 3% mark on Sept. 6.
"The longer the Washington stalemate goes on, the longer the Fed will feel obliged to maintain asset purchases at $85
billion per month," said Adrian K. Miller, senior global market strategist at GMP Securities LLC in New York.
In a recent report, Morgan Stanley strategists recommend that global investors buy Treasury bonds and sell Japanese
government debt. They expect 10-year Treasury yields holding in a 2.4% to 2.6% in the coming six months and possibly
longer depending on the health of U.S. economic data and how it impacts the Fed decision on tapering bond buying.
COUPON ISSUE PRICE CHANGE YIELD CHANGE
1/4% 2-year 99 28/32 flat 0.317% flat
5/8% 3-Year 100 26/32 up 1/32 0.599% -1.1BP
1 3/8% 5-year 100 2/32 up 4/32 1.362% -2.8BP
2 1/8% 7-Year 100 2/32 up 5/32 1.990% -2.7BP
1 3/4% 10-year 99 2/32 up 5/32 2.606% -2.0BP
2 7/8% 30-year 98 17/32 up 1/32 3.707% -0.2BP
2-10-Yr Yield Spread: +228.9 BPS Vs +230.3 BPS
Write to Min Zeng at email@example.com
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