US bond prices rally, further gains seen

NEW YORK: US Treasury debt prices rose on Tuesday, boosted by safe-haven buying as a revolt in Libya made oil prices spike, and some analysts see further price gains, expecting momentum over economic growth to wane.

Technical indicators also suggested room for yields to fall further as five- and 10-year notes and 30-year bonds all broke below recent technical resistance levels.

Brent crude oil and US oil prices soared to 2-1/2-year highs on Tuesday as Libyan leader Muammar Gaddafi used tanks, helicopters and warplanes in an effort to shut down a growing revolt in the country.

Stocks slumped in tandem with Treasury gains, closing sharply lower, as investors worried the violence could spread to other major oil producers in the Middle East and North Africa.

Fears that the fastest stock rally in history, which has seen the benchmark Standard & Poor's 500 stock index double from its March 2009 low, has run its course added to the relative appeal of US government bonds.

"We're pausing partly because of the Middle East but also partly because we've seen an awful lot of people get nervous about stocks," said Jim Vogel, interest rate strategist at FTN Financial in Memphis, Tennessee.

Treasury yields jumped in early February as investors, cheered by improving economic data, anticipated further improvement and some rates markets priced in an expectation that Federal Reserve interest rate hikes will begin by year-end.

Analysts see this move, however, as overdone and likely to fade in the near term.

"Any trade that you can do that expresses the view that the Fed is not going to hike in the next year, or probably longer, you want to take advantage of," said Ira Jersey, interest rate strategist at Credit Suisse in New York.

Economic growth and worries over inflation have encouraged traders to raise their bets the US central bank will increase its target rate at the end of 2011 for the first time in three years.

Benchmark 10-year notes rose a point in price on Tuesday to yield 3.46 percent, down from 3.58 percent late Friday, breaking below key resistance at 3.56 percent for the lowest yield in about three weeks. Markets were closed Monday for Presidents Day.

The notes, which were also on track on Tuesday for their biggest one-day rally since December, had reached a 10-month high of 3.77 percent on Feb. 9.

Credit Suisse sees the note's yields as likely to fall to around 3.30 percent by the end of this quarter, saying economic growth momentum is likely to slow.

"As long as you get that slowdown you'll probably see rates rally back a little bit," Jersey said.

Five-year note yields rose 19/32 in price to yield 2.14 percent, down from 2.27 percent late on Friday and falling below technical resistance of around 2.20 percent.

Thirty-year bonds, meanwhile, rose 1-10/32 in price to yield 4.61 percent, down from 4.69 percent Friday and breaking through resistance at around 4.62 percent.

A $35 billion sale of new two-year notes was also seen as strong on Tuesday, pricing slightly below where the notes traded before the auction, with an average yield of 0.71 percent. This was in spite of dealers taking the highest allocation in the sale since 2009, at 62 percent.

The Treasury will auction $35 billion of five-year notes on Wednesday and $29 billion of seven-year notes on Thursday.

Meanwhile the Fed purchased $7.24 billion of notes due 2016 through 2018 on Tuesday as part of its efforts to prop up the economic recovery.