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Treasury bond yields fall despite S&P's warning on U.S. credit rating

April 18, 2011 | 12:48 pm

The surprise move by Standard & Poor’s on Monday to lower its outlook on America’s credit rating isn’t having the effect investors might have expected.

Yields on U.S. Treasury bonds are down from Friday’s levels, with the benchmark 10-year T-note at 3.37% at about 12:45 p.m. PDT, compared with 3.41% on Friday.

The five-year Treasury note yield fell to 2.06% from 2.12% on Friday.

Treasury yields initially rose when trading began Monday, pushing the 10-year T-note to 3.46%, as investors reacted to S&P’s decision to change the outlook on its AAA U.S. rating to “negative” from “stable,” citing concerns about the country’s massive budget deficits.

A lower rating would be expected to boost the nation’s borrowing costs in the long run.

But in the short run, Treasuries are demonstrating that they’re still many global investors’ favorite haven. And as scary as a possible future downgrade of America’s credit rating might be, there are bigger worries for markets at the moment -- particularly the worsening situation with Europe’s government debt.

Yields on Greek, Irish, Portuguese and Spanish government bonds surged Monday on growing speculation that Greece will have no choice but to default on its debts, despite the bailout already in place from the European Union.

Greek 10-year bond yields soared to 14.55% from 13.83% on Friday.

What’s more, an anti-euro party in Finland scored significant gains in an election Sunday and vowed to block the EU’s pending bailout of Portugal.

The sell-off in European bonds also caused heavy selling in the continent’s stock markets (most major markets fell 2% or more) and hammered the euro, which has fallen to $1.423 from $1.443 on Friday.

With U.S. stocks also broadly lower -- reacting both to Europe’s turmoil and to S&P’s warning on U.S. debt -- money has to go somewhere, and some of it is flowing into Treasuries, as is usually the case in times of global market upheaval.

After all, S&P didn't warn of a U.S. debt default, just a possible lower credit rating. If America were to fall to AA it would be at the same level as Japan and China.

-- Tom Petruno