Investors rush into bonds after US downgrade

NEW YORK: US Treasuries soared on Monday in their first New York trading session since the Standard & Poor's downgrade of the United States' top-tier AAA credit rating as stocks sank on fears that the ratings action would ripple through the corporate and financial sectors.

Standard & Poor's downgraded the US credit rating by one notch to AA-plus from AAA after markets closed on Friday, citing a lack of confidence that government leaders could get the budget deficit under control and shape a long-term plan for US finances. For details, see

The three major US stock indexes lost about 3 percent to 4 percent as the rating cut intensified investors' worries that the economy was poised to slide back into recession.

Perhaps ironically, investors chose the liquidity and perceived safety of US Treasuries due to uncertainty about what the move meant for stocks and other kinds of assets that rely on economic growth.

"We're the least dirty shirt in the bag," said Joe Larizza, director of governments and agencies trading at Vining Sparks in Memphis, Tennessee.

The price of the 30-year US Treasury bond jumped more than 3 points, while the benchmark 10-year note's price shot up nearly 2 full points, and the 7-year note rallied well over a point.

The 30-year bond was last trading up 3-4/32 points in price and yielding 3.69 percent, down from a close on Friday at 3.85 percent.

The 10-year Treasury note was last up 1-26/32 in price and yielding 2.36 percent, down from 2.57 percent late on Friday.

"Its 'big picture' stuff," said Todd Colvin, a futures trader at MF Global Securities in Chicago. "Macro guys are looking at this, and it's not what's going to happen tomorrow -- it's what's going to happen months from tomorrow. You could see weaker demand for US products from other countries and this is probably going to hit the municipal markets."

Even though the downgrade will not change the current state of the economy, some said it could pressure growth.

"You have to acknowledge the impact this will have from a confidence perspective," said Tom Porcelli, US economist at RBC Capital Markets in New York.

"This, in and of itself, isn't enough to knock us back into a recession, but the odds of that had already risen."

Sovereign debt problems in the euro zone added to Treasuries' appeal. Traders estimated the ECB bought about 2 billion euros in Italian and Spanish debt after it agreed on Sunday to broaden its controversial bond-buying program for the first time to include the bloc's third- and fourth-biggest economies.

Christian Cooper, head of dollar derivatives trading at Jefferies & Co in New York, said there was potential for a delayed effect on Treasury demand from the downgrade.

"If suddenly insurance or real money investor gets an opinion from legal saying, 'Hey, this does matter to us something operational things could change. That could lead to a broader adoption of that same idea.

"If one major company realizes, 'This is a problem for us and we didn't think it was before,' that means everyone is going look at their portfolio and their covenants in greater detail."

Treasury strategists were adjusting their rates outlook, expecting lower Treasury yields in the future.

"We got the breakdown in S&P futures that we feared last week (break of primary bull trend-line at 1,266) which significantly raises the odds of a double-dip recession," said William O'Donnell, head of interest-rate strategy at RBS Securities in Stamford, Connecticut, in a note to clients.

O'Donnell called for a yield target of 2.33 percent on the 10-year note. He saw technical support levels for the 10-year note's yield at 2.72 percent and 2.86 percent.

The three-year note was last up 8-32 in price for a yield of 0.41 percent, down from 0.49 percent at Friday's close.

Copyright Reuters, 2010