Long-dated Treasuries fall

Long-dated Treasuries fell for a second straight day on Thursday on sales associated with corporate debt issuance, but shorter maturities held steady, supported by demand from investors seeking safe-haven assets amid growing troubles in the subprime mortgage market.
Investors have gravitated to low-risk, short-dated Treasuries to shield themselves from problems in the subprime sector, which resurfaced in recent days involving two hedge funds managed by Bear Stearns.
The funds, which once had over $20 billion of assets, lost billions of dollars from bad bets on securities backed by subprime mortgages - loans made to less-creditworthy borrowers - many of whom are now getting squeezed as interest rates rise and home values fall. Now investors fear the funds' troubles could spill over into broader debt markets.
"The reality is that the flight-to-quality quotient that is in the market is all about the front end," said Jim Caron, co-head of global rates research with Morgan Stanley in New York.
Two-year Treasury notes, were unchanged in price for a 4.98 percent yield. "We are seeing wider swap spreads, a richer front end, a classic flight to quality" on subprime worries and the Bear Stearns hedge funds developments, Caron said.
The 10-year swap spread - a gauge of investor sentiment in riskier assets - widened sharply to about 62.75 basis points late on Thursday, from about 60 basis points late on Wednesday.
"There is a lot of uncertainty and nervousness in swap spreads directionally with rates," said Fidelio Tata, interest-rate derivatives strategist with RBS Greenwich Capital in Greenwich, Connecticut. "So far from what I see, most convexity hedgers (mortgage investors) are still on the sidelines and want to see if there is a spillover from the Bear Stearns story in all general spreads," he said.
If the 10-year swap spread were to widen to about 65 basis points, that would be the widest since August 2003, Tata said. Selling of longer-maturity Treasuries associated with a heavy slate of corporate bond issuance weighed on long-dated Treasury prices, Caron added.
A stronger-than-expected regional business activity survey dealt long maturities a brief blow, but the market's focus soon returned to riskier, non-governmental bonds.
Ten-year notes, which serve as benchmarks for longer borrowing costs, were down 12/32 in price to yield 5.19 percent, versus 5.14 percent late on Wednesday. Bond prices and yields move inversely.the price of the 10-year note fell after the Philadelphia Federal Reserve's index of business conditions in the US Mid-Atlantic region rose much more than expected in June. The 10-year note's yield reached a five-year peak above 5.30 percent during last week's market rout.
The flight to safety into shorter maturities has steepened the gap of 10-year note yields above 2-year note yields to about 20 basis points, its steepest level in more than a week.
"The fallout from subprime is playing a role, more so in the front end. At the back end, we are just trying to find an even keel. We are moving back more towards the middle of the trading range, around the 5.15 percent level" in the 10-year note's yield, said Kevin Flanagan, fixed-income strategist for global wealth management with Morgan Stanley in Purchase, New York.
Fears of subprime troubles in other hedge funds have rippled across fixed-income markets, with widening spreads on swaps and on the European iTraxx Crossover index.
"There's a bit of risk aversion going on," said John Jansen, director of fixed-income sales at CastleOak Securities in New York. A slew of corporate bond issuance, with some $25 billion of deals already this week, was a temporary weight on long-dated Treasury prices, traders said. Market participants typically sell Treasuries ahead of corporate deals, then buy Treasuries back once the deals price. The 30-year bond fell 28/32 in price for a yield of 5.31 percent, versus 5.25 percent late on Wednesday.