NEW YORK: Shorter-dated US Treasury debt prices rose on Monday as investors scrambled for the lowest-risk investments after ratings agency Standard & Poor's revised the US credit outlook to negative.
Longer-dated bonds reversed early gains to trade negative in price in worries any eventual threat to the US AAA sovereign credit status would eventually undermine the value of the debt of the world's largest economy.
While S&P affirmed its AAA sovereign credit rating on the United States, it said very large US budget deficits and rising government indebtedness, and no clear path to addressing these issues, signaled there was at least a one-in-three likelihood that it could lower its long-term rating on the United States within two years.
"The short end of the Treasury curve does not have any of the real risk to that area," said Kim Rupert, managing director of global fixed-income analysis at Action Economics in San Francisco.
Two-year Treasury notes rose 2/32 in price to yield 0.66 percent, down from 0.70 percent late on Friday.
In contrast, the 30-year bond fell 10/32 in price to yield 4.49 percent, up from 4.47 percent late Friday,
The trade steepened the Treasury curve, with the gap between two-year note yields and 30-year bond yields widening to 383 basis points -- or the largest spread since March 17 -- from 377 basis points late on Friday.
"What the agencies want to see is real steps taken to improve the situation. In the absence of that, a downgrade is not far," said Tom Porcelli, US economist at RBC Capital Markets in New York.
The S&P's change to the US outlook highlighted continued economic stress around the world. Greece on Monday denied a newspaper report saying it wants to extend maturities on its outstanding debt, but markets speculated anyway that some sort of Greek debt restructuring was in the works.
Early in the day, flight-to-safety buying boosted the entire US Treasury curve, sending the benchmark 10-year note's yield down to 3.37 percent, marking the lowest since March 24. Yields also traded below their 100-day moving average for the first time since March 17, in a move that some investors interpreted as a possible bullish signal for bonds.
"We believe that the confluence of bullish factors, particularly turmoil in foreign markets -- euro-zone concerns -- as well as generally positive Treasury dynamics, like technicals and the passage of supply, should override bond bearish factors such as the impending debt ceiling debate and the longer-run fiscal profligacy of the US," said George Goncalves, head of US interest rates strategy at Nomura Securities International in New York.
The benchmark 10-year Treasury note rose 3/32 in price to yield 3.40 percent, down from 3.41 percent late on Friday.
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