Long-dated US government bonds rose on Thursday, spurred by stock losses and the view that fiscal restraint from possible automatic US budget cuts would hurt long-term economic growth and keep inflation low. Worries about the debt crisis in Europe fed appetite for safe-haven US government debt and were likely to remain in the forefront of investors' concerns in coming days.
Major stock indexes all fell. Some sources cited talk about the US Congressional panel's lack of progress on its mandate to find $1.2 trillion in budget cuts over the next 10 years. On the US economic front, news that US claims for new jobless benefits hit a seven-month low last week and permits for future home construction rebounded strongly in October suggested the economic recovery was gaining traction.
October's US leading indicators index due on Friday is expected to be up 0.6 percent. The more upbeat economic data would have helped stocks and hurt bonds were it not for the eurozone debt crisis and concerns about slower growth outside the United States. "The Treasury market is not focusing on economic news, given headlines from Europe or the November 23 deadline for the US deficit-cutting committee," said Kevin Flanagan, chief fixed-income strategist at Morgan Stanley Smith Barney.
A 12-member "super committee" comprised of Republicans and Democrats are trying to produce at least $1.2 trillion in budget savings over 10 years. A letter from 72 Republican lawmakers urged Republican members of the panel to rule out any deal that includes tax increases.
Failure to reach a deal, however, risks triggering automatic budget cuts that could restrain long-term growth and keep inflation low, a constructive outlook for fixed-income investments whose value are eroded by inflation. "Investors are thinking no agreement would trigger automatic budget cuts which would mean more fiscal restraint and slower economic growth," said Ian Lyngen, senior government bond strategist at CRT Capital Group.
But while the market is not counting on a deficit-cutting agreement, a compromise cannot be ruled out, Flanagan said. "Expectations are so low to begin with, that anything suggesting some kind of agreement would be negative for Treasuries since it would encourage a risk-on trade," he said.
Ten-year notes rose 9/32 in price, their yields easing to 1.96 percent from 1.99 percent on Wednesday. Debt yields have fallen from around 2.40 percent three weeks ago as fears over contagion from Europe's credit problems increased the safe-haven demand for Treasuries. Thirty-year bonds rose 31/32, their yields easing to 2.99 percent from 3.02 percent late on Wednesday.