New fears on Greece, Fed purchases propel bonds

NEW YORK: US Treasuries prices rose on Monday after news that Greece will miss its deficit target renewed safe-haven demand and on bets on the Federal Reserve's latest stimulus program.

The Treasuries market began the fourth quarter with a strong start after a robust third quarter, in which longer-dated debt prices recorded their best performance since the last three months of 2008, during the height of the global financial crisis.

"We were powered higher in response to the sell-off in global equities, which followed the news that Greece will miss its deficit target," said John Canavan, market strategist at Stone & McCarthy Research Associates in Princeton, New Jersey.

Investors fear Greece is closer to default after the debt-laden euro zone member said it will miss its deficit target this year despite tough budget reduction measures. The outlook drove down global stocks and sparked a rush into Treasuries, German Bunds and other safe-haven assets. See

The Fed's "Operation Twist" debuted on Monday with a $2.50 billion purchase of long-dated bonds due in February 2036 to August 2041. The Fed had planned to buy $2.25 billion to $2.75 billion of these long-dated issues.

It will conduct three more purchases of longer-dated debt this week and one sale of short-dated issues on Thursday.

The US central bank's $400 billion bond program is aimed at lowering long-term borrowing costs like mortgage rates in an attempt to boost loan activity, whose recent slowdown has worried policymakers.

Analysts said it is too early to determine a pattern on the Fed's approach to twist the yield curve lower, but the Fed program and the debt turmoil in Europe could exert downward pressure on US yields.

"There is a downshift in growth and inflation expectations. Real fears continue to grip global markets. In this context, the 'Twist' is just riding the wave," said Eric Green, chief of US rates research and strategy at TD Securities in New York.

There is a chance the 10-year yield could fall to 1.25 percent and the 30-year yield to 2.25 percent, Green said.

The Treasuries market briefly pared initial gains after better-than-expected data on manufacturing and construction spending allayed concerns the US economy is slowing as much as some feared.

The Institute for Supply Management said its index of US manufacturing activity unexpectedly rose to 51.1 in September, up from 50.6 in August. Economists had forecast the gauge to come in at 50.5.

A reading above 50 indicates expansion.

In a separate report, the government said US construction spending rose 1.4 percent in August; the market had expected a 0.3 percent decline.

The 30-year bond was up 3-2/32 in price for a yield of 2.78 percent, down from 2.92 percent late Friday. Bonds were on track for the biggest single-day drop in yield since Sept. 22, the day after the Fed announced "Operation Twist." Over a week ago, bond yields touched 2.739 percent, the lowest level since January 2009.

Benchmark 10-year notes last traded up 1-4/32 for a yield of 1.80 percent, down from 1.92 percent late Friday. More than a week ago, the 10-year yield touched 1.674 percent, the lowest level in at least 60 years.

Copyright Reuters, 2011