Benchmark yields at fresh 60-yr low on grim US outlook

LONDON: US Treasuries extended gains in Europe on Thursday, pushing benchmark yields to fresh 60-year lows as investors spooked by the Federal Reserve's gloomy economic outlook cut exposure to riskier assets and piled into safe-haven government bonds.

The Treasury curve steepened sharply after the Fed unveiled an anticipated but slightly bigger-than-expected plan to buy long-term bonds to bring down borrowing costs and bolster the economy, citing "significant downside risks" to the economy.

The rally in Treasuries, UK gilts and German government bonds gained momentum as European equities slid 3.7 percent to a one-week low, the US dollar hit a seven-month high while the Australian dollar, a proxy for global growth, fell below parity against the greenback for the first time since early August.

US stock futures indicated further losses on Wall Street, with S&P futures down 3.4 percent.

"Equities have had a really bad reaction ... There's nothing to suggest that this (bond) rally stops. Thirty-year yields are comfortably through 3 percent, 10s are at new lows. Pullbacks will be very, very limited in this market," Barra Sheridan, a trader at Bank of Montreal in London, said.

The 10-year T-note yield fell 5.5 basis points to a new 60-year low of 1.796 percent while the 30-year T-bond yielded 2.914 percent its lowest since January 2009 after the Fed said it planned to increase long-term bonds in its portfolio.

The move, dubbed "Operation Twist", will involve buying $400 billion of Treasuries in the 6- to 30-year maturity range by the end of June 2012, and selling an equal amount of debt with maturities of three years or less. Fed purchases will now absorb the vast majority of new long-maturity debt supply.

The T-bond yield plummeted 22 bps on Wednesday and traders said it could test a low of 2.52 percent hit in December 2008.

FURTHER CURVE FLATTENING

The 10/30-year yield gap was at its narrowest in four months around 111 bps with some traders seeing it falling to as low as 95-100 bps in coming days.

"We have also noted that the 30-year appeared to have attracted a new breed of buyer -- the yield-hunter -- owing to its recent habit of being the most volatile part of the yield curve," Credit Agricole strategists said in a note.

"The 30-10-year spread is still very high compared to 2-10-year and the swap spread is still negative. We continue to expect the 30-year to perform well within the Treasury curve, even after the FOMC-induced curve flattening, the sector can be argued as being cheap."

Analysts have been sceptical about how effective the Fed move will be, which gives investors more reason to buy bonds rather than riskier assets.

Wall Street sees only a 15 percent chance that the Fed's latest plan to intervene in the bond market will give the US economy a meaningful boost, according to a Reuters poll conducted after the announcement.

The yield spread between higher-yielding US Treasuries and German Bunds narrowed to 13 basis points from around 14 bps at Wednesday's European settlement. Traders said the two were likely to trade in sync near-term given persistent concerns about a potential default by debt-choked Greece.

Copyright Reuters, 2011