US bonds have best week since 08 on Europe, Fed

NEW YORK: Benchmark US Treasuries ended Friday with the largest one-week gain in two-and-a-half years as hopes over the economy sank and investors speculated a new round of federal stimulus was likely.

Ten-year note yields plunged 30 basis points this week and at one point tested their record lows set in December 2008, as investors flooded the market as one of the few remaining safe havens even after losing its top credit rating by Standard & Poor's.

Investors have also been reaching for longer-dated Treasuries as returns on shorter-dated debt were slammed after the Federal Reserve said on Tuesday it expected to keep rates on hold for at least another two years.

"Putting a time frame on it has given a clear signal to the front end of the market to start looking for value," said Sean Murphy, a Treasuries trader at Societe Generale in New York. "It seems demand is concentrated in the 10 year (notes)."

Ten-year notes were last up 25/32 in price to yield 2.28 percent, down from 2.56 basis points a week ago.

Two-year notes yields have plunged in the last week to return only 0.18 percent, down from 0.30 percent a week ago and 0.90 percent in March.

US debt has also been attractive as investors fled Europe as contagion spread to French banks and stress began to be felt in short-term funding markets.

Bonds extended price gains on Friday after data showed US consumer sentiment worsened sharply in early August, falling to the lowest index level since 1980, according to the Thomson Reuters/University of Michigan's preliminary reading.

"The last few weeks have just been brutal for consumers in the headlines," said Guy LeBas, chief fixed income strategist with Janney Montgomery Scott in Philadelphia.

WEAKENING ECONOMY MAY FORCE FED

Flagging economic data has increased speculation the Fed will introduce a new bond buying plan, which many expect to focus on extending purchases to longer-dated maturities.

"If you get any kind of belief that the economy doesn't have too much of a chance to see robust figures coming out of it, then the Fed does need to act and implement a new policy or some kind of change to their balance sheet," said SocGen's Murphy.

"The twist is going to be to keep their balance sheet the same by selling the front end assets and buying the longer end assets," he said.

Only the 30-year bonds, which are most sensitive to the country's long-term fiscal trajectory, remain well off their historical low yields.

The Fed is seen as unlikely to extend any purchases as far as 30-years.

The yield gap between 10-year notes and 30-year bonds expanded to 146 basis points on Friday, the widest level since November and out from 128 basis points a week ago.

Copyright Reuters, 2011