US Treasuries prices rose on Wednesday as stock market losses and fear Europe's debt crisis would widen fed a bid for safe-haven US government debt. Higher borrowing costs for European nations added to fear Europe would be dragged into a recession, one that would reach beyond the continent. Ten-year government bond yields for France, Europe's largest economy after Germany, rose to their highest level since April. Italian bond yields topped 7 percent.
Perceptions about the course of Europe's financial crisis looked likely to determine investors' willingness to take on risk in the days and weeks ahead. US housing starts, jobless claims figures, and regional manufacturing data due on Thursday could be overshadowed by the European crisis, analysts said.
"With the crisis escalating in Europe, people think the US will be back in the dumps in three months from European contagion," said Cary Leahey, managing director and senior economist at Decision Economics. Treasuries also looked to the stock market as a reflection of investors' willingness to tolerate risk and that dynamic was expected to continue on Thursday as well.
On Wednesday, major stock indexes were lower in late trade. Bonds, in turn, were higher. "The stock market is about half way between the recent highs and lows and doesn't really know where to go, but promising US economic data won't help it much because of Europe," Leahey said. According to economists polled by Reuters. US housing starts totalled an annualised 0.610 million in October, fewer than the annualised 0.658 million in September.
New claims for state unemployment insurance are expected to total 395,000 for the week ended Saturday, up from 390,000 a week earlier. The timely November business activity diffusion index from the Federal Reserve Bank of Philadelphia is expected to read 8.0 for November, little changed from 8.7 in October, according to economists Reuters polled. Analysts said any unexpected weakness in US economic data could get an outsized reaction because investors will view it as a harbinger of economic weakness to come.
Conversely, signs of strength could elicit a more subdued reaction because investors might expect the strength to pass after the start of the new year. "Bonds at the moment are biased toward higher prices and lower yields," Leahey said. "They won't lose that much on a strong piece of economic data, but they could climb on a weak number. That's the market psychology at the moment."
Benchmark 10-year Treasury notes rose 11/32, their yields easing to 2.01 percent from 2.05 percent on Tuesday and 2.40 percent three weeks ago. Traders said yields were resisting going below 2 percent. "We are still really pretty much trading off of events in Europe," said Mary Ann Hurley, vice president of fixed income trading at D.A. Davidson & Co in Seattle. "Europe is the largest recipient of our exports, so all of the events in Europe are going to have a negative impact on growth here."
The European Central Bank bought Italian and Spanish bonds on Wednesday to stem a dramatic rise in the region's debt yields. The yield spread between 10-year French government bonds and their German equivalents widened to a euro-era high of 195 basis points on Wednesday, showing investors' reluctance to hold anything but safe-haven German bunds in the region.