Debt, economic worries lift US bond prices

US Treasuries prices rose modestly on Friday as sovereign debt problems on both sides of the Atlantic and worries over a faltering US economy revived safe-haven demand for US government debt. The gridlock in Washington over reaching a deal to cut the deficit and raise the $14.3 trillion debt ceiling has done little to reduce the appeal of Treasuries, at least for now - and despite debt downgrade warnings from Moody's Investors Service and Standard & Poor's in the past 48 hours.
The two major ratings agencies warned they will strip the United States, the world's biggest economy, of its top-notch credit rating if it does not increase its borrowing limit to avoid a default. "Everything that's bad is good for Treasuries even if there's a default," said Thomas Roth, executive director of US government bond trading at Mitsubishi UFJ Securities USA Inc in New York.
There is a growing, though far from consensus, view that while a United States default would hurt the credit-worthiness of Treasuries, it would devastate stocks and risky investments even more, making investors scramble for Treasuries to store cash. "Treasuries look the best of a bad lot. The US will make good on its payments despite a short-term disruption," said Anthony Valeri, fixed income strategist at LPL Financial in San Diego, which manages $280 billion in assets.
The yield spreads on Fannie's and Freddie's debt versus Treasuries widened a smidge on the S&P announcement. While the tension in Washington continues over the debt ceiling, the results of bank stress tests from Europe reduced fears over the region's fiscal problem on its banking system. The less dismal results briefly pared bids for Treasuries.
Benchmark 10-year Treasury notes were trading 13/32 higher in price to yield 2.91 percent, down from 2.96 percent late Thursday. Benchmark yields on Tuesday had dipped to 2.82 percent, the lowest in seven months, due to worries over contagion from the debt crisis in Europe. The 30-year bond ended up 5/32 after erasing a one-point drop. Its yield finished at 4.25 percent, up 1 basis point from Thursday.