Treasury yields fall

US Treasury yields fell on Monday, with benchmark yields hitting nearly two-week lows after a tumble in Chinese shares fuelled worries over global growth and drove demand for safe-haven US government debt. Mainland Chinese shares fell 7 percent, triggering a new circuit breaker that prompted a trading halt, after surveys showed factory activity in the world's second-largest economy shrank sharply in December.
Yields on benchmark 10-year Treasury notes hit 2.200 percent, their lowest since December 22. Yields on Treasuries maturing between five and seven years also hit nearly two-week lows, while 30-year yields hit their lowest in nearly a week, at 2.939 percent. "With equities starting off the year like this, it's just a flight to quality," said Charles Comiskey, head of Treasuries trading at Bank of Nova Scotia in New York.
Analysts also said a deterioration in relations between leading crude producers Saudi Arabia and Iran stoked demand for safe-haven Treasuries. Saudi Arabia cut diplomatic ties with Iran on Sunday after Iranian protesters stormed the Saudi embassy in Tehran following the kingdom's execution of a prominent Shia cleric. On Wall Street, the benchmark S&P 500 stock index was last down more than 2 percent.
Despite the risk aversion, analysts said traders were not growing more skeptical the Federal Reserve would have to slow the pace of rate increases. They said short-dated Treasury yields would have fallen more if traders were taking that view. Three-year yields hit their lowest in nearly three weeks at 1.266 percent, while two-year yields hit their lowest in over a week, at 1.008 percent. While oil prices initially rose on the Middle East tensions, they settled lower. That reversal suggested inflationary pressures were still tame, which helped keep long-dated Treasury yields lower, said Lou Brien, a market strategist at DRW Trading in Chicago,
Many analysts view higher oil prices as a sign of inflationary pressure. Long-dated Treasuries tend to perform better during periods of lower inflation since inflation erodes their interest payouts. Data showing US construction spending fell for the first time in nearly 1-1/2 years in November also supported Treasuries prices. Benchmark 10-year Treasury notes were last up 10/32 in price to yield 2.239 percent, from a yield of 2.275 percent late Thursday. US 30-year Treasuries prices were last up 17/32 to yield 2.984 percent, from a yield of 3.013 percent late Thursday. Two-year notes were up 2/32 to yield 1.032 percent, from a yield of 1.064 percent late Thursday.