Bonds rise on weaker stocks before 2-year supply

NEW YORK: US Treasuries prices rose on Tuesday, as a decline in the US stock market renewed a bid for bonds despite nagging worries over a possible US default that could slam the value of government debt.

Fears that the government will run out of cash by Aug. 2 if lawmakers do not come to an agreement in their debt talks have fueled anxiety about appetite for this week's $99 billion worth of new debt supply, starting with a $35 billion auction of two-year notes later Tuesday.

"We have a lot of uncertainties with these auctions with what's happening in Washington. People are hesitant to take on risk," said Thomas Roth, executive director in US government bond trading at Mitsubishi UFJ Securities USA in New York.

Lawmakers are trying to reach a deal to raise the $14.3 trillion US debt limit and avoid a default, but many on Wall Street worry that the United States could lose its top-notch credit rating even if a default is averted ahead of the Aug. 2 deadline.

Anxiety over the United States' long-term creditworthiness has hurt the Treasuries market in recent days, but investors have not dumped US government securities either.

Europe's festering debt problem and signs of slowing US economic growth have stemmed any sustained selling in Treasuries, capping a rise on bond yields, analysts said.

In two weeks, benchmark Treasury yields have risen 10 basis points from their eight-month lows.

"Traders are battling interest rate risk with an economy growing slower than expected. On the other hand, you have a credit event with Treasuries. The market is struggling between those two risks," said John Herrmann, senior fixed income strategist at State Street Global Markets in Boston.

Data on Tuesday showed the US housing market is still struggling, while consumer sentiment surprisingly improved despite weak job conditions and anxiety over the wrangling in Washington.

In this uncertain climate, the cash-strapped government is looking to raise funds by selling in two-year, five-year and seven-year notes this week.

Shortly after 1 p.m. EDT (1700 GMT), the Treasury will announce the results on its $35 billion sale of two-year notes.

In the when-issued market, traders expect the new two-year notes to sell at a yield of 0.422 percent, slightly above the 0.404 percent yield on two-year notes in the open market.

Despite worries over a possible US default, the two-year note yield is only above 0.10 percentage point above its all-time low, due mainly to the Federal Reserve's near-zero interest rate policy.

In cash trading, the benchmark 10-year Treasury note was up 9/32 in price with a yield of 2.97 percent, down 4 basis points on the day, while the 30-year bond was up 19/32 with a yield of 4.28 percent, down 3 basis points from late Monday.

In the credit default swap market, the cost to insure Treasuries for five years held steady at its highest level in more a year at 57 basis points, or $57,000 to insure $10 million worth of Treasuries, according to Markit.

On Wall Street, major US stock indexes fell after weakness in 3M Co. and United Parcel Service Inc, which both reported earnings.

Copyright Reuters, 2011