The United States dodged a bullet from the bond market on Monday, as investors resisted the temptation to dump Treasuries after Standard & Poors warned Washington it could lose its top-notch credit rating. Instead bond prices posted solid gains, including the 30-year bond, as falling stock prices took over as the main driver for price action in the bond market. Bond prices frequently trade inversely to stocks.
The market once known for "bond vigilantes" who enforced fiscal prudence with the threat of higher interest rates barely batted an eyelash at S&P's decision to lower the US credit outlook to negative from stable. While the US debt outlook is certainly problematic, it's not as immediately damaging as the euro zone's sovereign woes have been.
Carmen Reinhart, a senior fellow at the Peterson Institute for International Economics in Washington, who co-authored a book chronicling sovereign debt crises over eight centuries, said Treasury investors would not be able to count on such muted reactions in the future.
"Those opportunities are going to become rarer and rarer as our debt sustainability fundamentals continue to deteriorate and it begins to sink in the pricing of the debt," she said. Two-year Treasury notes were trading 2/32 higher in price to yield 0.67 percent, down from 0.70 percent late on Friday.
After an earlier sell-off, the 30-year bond was 8/32 higher in price and yielding 4.46 percent, down from 4.47 percent late Friday. The gap between two-year note yields and 30-year bond yields briefly hit a recent high of 384 basis points, or the largest spread since March 17, but it was last at 379 basis points, up from 377 basis points late on Friday.
Benchmark 10-year yields fell to 3.38 percent, and briefly touched 3.37 percent, the lowest since March 24. Yields also traded below their 100-day moving average for the first time since March 17. Ten-year Treasury notes were last trading 10/32 higher in price.
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