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Treasury bond yields tumble on economic fears

May 26, 2011 | 11:38 am

The spring rush to buy U.S. Treasury bonds is turning into a stampede as continued weak economic data push more investors into haven-seeking mode.

The yield on the 10-year Treasury note (charted below) slid under 3.10% on Thursday for the first time since early December, after the government’s revised report on first-quarter economic growth came in softer than expected -- more evidence of the recovery’s loss of momentum this year.

10yr526 The 10-year T-note yield, a benchmark for mortgages rates, dropped to 3.07% by about 11:20 a.m. PDT from 3.13% on Wednesday.

Yields also fell on shorter-term bonds, helping to boost demand at the Treasury’s auction of $29 billion in seven-year notes. The notes were sold at a yield of 2.43%, below expectations.

Thursday’s bond sale was the third by the Treasury this week, after it sold $35 billion in two-year notes on Tuesday and $35 billion in five-year notes on Wednesday. All three auctions attracted robust bidding.

“It’s just continued [economic] growth concerns and a flight-to-quality from worries abroad,” particularly Europe’s debt woes, said Justin Lederer, interest rate strategist at brokerage Cantor Fitzgerald in New York.

What’s more, analysts say, many big investors simply find themselves owning too few Treasuries after betting earlier this spring that the economy would improve and put upward pressure on bond yields. The approaching end of the Federal Reserve’s $600-billion Treasury-bond-buying program, scheduled for completion on June 30, also was expected to drive up yields -- a view espoused by Pimco bond guru Bill Gross. (For the latest from Gross, see this Bloomberg video interview.)

With yields falling instead some investors now are scrambling to grab Treasuries to guard against the risk that the economy stumbles badly from here.

The yield on two-year T-notes, a favorite hiding place for worried investors, has slipped below 0.50%, to 0.498% from 0.53% on Wednesday. Those notes paid 0.83% as recently as April 11.

So far, though, the fear factor that’s pushing cash into government bonds Thursday isn’t registering in the stock market. Share prices are modestly higher, with the Dow Jones industrial average up 35 points, or 0.3%, to 12,429.

-- Tom Petruno

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