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Economic fears spur new rush into Treasury bonds

June 22, 2010 | 12:54 pm

The Treasury saw ravenous demand at its sale of $40 billion in new two-year notes Tuesday.

That’s a bad sign for the U.S. economy: It suggests many investors again are looking for a hiding place, fearful that growth will fizzle in the second half of the year.

Uncle Sam got $3.45 in bids for every $1 in two-year notes offered, the highest so-called bid-to-cover ratio since October.

The annualized yield on the notes was 0.74%, down from 0.77% at the May two-year note auction. Investors continued to pour into Treasuries after the sale, driving the yield on the previously issued note to 0.68%, the lowest since December (see chart, below).

Twoyearnote Longer-term Treasury yields also are slumping as stock prices tumble, reinforcing economic concerns. The 10-year T-note yield was trading at 3.16%, down from 3.24% on Monday and nearing the recent 52-week low of 3.14% reached on June 7.

The two-year note sale “knocked the cover off the ball for the Treasury markets,” said George Goncalves, head of U.S. interest rate strategy at Nomura Securities in New York.

Bond analysts said the National Assn. of Realtors’ weak report on May existing-home sales added to worries that the housing market could drag the economy down again, risking a dreaded "double-dip" recession.

Tom Tucci, head of government bond trading at RBC Capital Markets in New York, said some of the demand for two-year T-notes reflected the usual end-of-quarter moves by banks and other investors to bolster their balance sheets with liquid securities.

But he said more investors also were taking the view that “without fiscal stimulus the economy has no momentum.” That boosts the appeal of Treasuries as a refuge, even at nominally low interest rates.

What’s more, Federal Reserve policymakers, who will wrap up a two-day meeting Wednesday, are expected to repeat their pledge to keep their benchmark short-term rate near zero for an “extended period.”

The Treasury market will face a bigger test of investor demand Wednesday and Thursday, when the U.S. will sell $38 billion in five-year notes and $30 billion in seven-year notes, respectively.

-- Tom Petruno

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