US Treasuries prices rose on Tuesday on European debt worries and a solid three-year note sale, but the modest gains suggest that investors are wary of the demand for the longer-dated supply still to come. The bond market advanced for a third straight session, and benchmark yields touched their lowest level since early December. Fears over the risk of a US default limited gains as Washington struggles to reach a deal to raise the $14.3 trillion debt ceiling.
"Caution is clearly warranted given all the possible outcome of these events," said Gibson Smith, co-chief executive officer of fixed income at Janus Capital Group in Denver. Treasuries briefly turned flat after minutes released from the Federal Reserve's last policy meeting on June 21-22 hinted that policy makers left the door open for more stimulus if US growth were too slow to reduce unemployment.
While Treasuries would benefit in the short run if the Fed were to engage in another round of bond purchases, the Fed would risk stoking inflation in the long run and hurting the dollar's reserve currency status. The benchmark 10-year Treasury note last traded up 4/32 in price with a yield of 2.91 percent, down 1.4 basis points from late Monday. It touched 2.82 percent in overseas trading, which was the lowest level since early December.
The world's biggest bond fund beefed up its Treasuries holdings. Pimco's $243 billion Total Return Fund held 8 percent in Treasuries and Treasury-related securities at the end of June, up from 5 percent a month earlier. Janus' Smith said he began raising his Treasuries holdings two months ago "as a hedge against uncertain outcomes." It remains unclear how soon European officials will come up with a second bailout package for Greece in a bid to stop its fiscal problems from spreading to Italy, Spain and other members of the eurozone. The region's finance ministers have not ruled out a possible Greek default.