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Treasury bond yields dive again; some T-bill buyers said to take less than zero

Almost nobody on Wall Street believes that Treasury bonds are attractive investments at current yields.

But they’re still buying them, as many nervous investors focus on return of capital rather than return on capital.

Treasury yields sank again Thursday as economic reports in the U.S. and in Europe pointed to more weakness, and as financial markets in general were roiled by plummeting oil prices.

The 10-year T-note yield (charted below) fell to 2.91%, down from 2.98% on Wednesday and the lowest since late November.

10yr623 Shorter-term yields also slid. Heavy demand for three-month Treasury bills -- considered the ultimate safe parking place -- drove their annualized yield to a mere 0.008% from 0.015% on Wednesday. Some trading services said T-bill yields actually went negative for a time, meaning investors would in effect be paying the government to hold their money.

The  latest slide in T-bill yields may reflect decisions by U.S. money market mutual funds to cash out some of the short-term European bank debt they own and bring the money home, as investors focus on potential risks stemming from the ongoing European government-debt crisis.

Federal Reserve Chairman Ben S. Bernanke on Wednesday said few money funds owned debt of governments or banks in Europe’s weakest countries (Greece, Ireland and Portugal) but that many funds had “substantial” holdings of securities issued by major German, French and British banks.

Because the biggest European banks, in turn, have significant stakes in Greek bonds and other troubled debt, the risk is that a default by Greece could start a chain reaction of panicked securities selling across the continent’s financial system -- shades of what followed brokerage Lehman Bros.’ collapse in September 2008.

But those concerns were blunted somewhat Thursday after European Union leaders agreed on more financial aid if the Greek government approves harsh new austerity measures. The EU has given the Greek Parliament a July 3 deadline to approve those measures.

With the Federal Reserve scheduled to complete its $600-billion Treasury-bond-buying program June 30, the concern a few months ago was that bond yields could jump if there weren’t enough private investors to replace the Fed’s demand.

For now, that definitely is not a problem.

As for how much lower Treasury yields might go, that may depend on whether economic data worsen and whether Europe succeeds in putting off, yet again, the risk of a Greek bond default.

Treasury-market bulls note that the 10-year T-note yield fell as low as 2.39% in October. But that low was driven in part by investors snapping up bonds in anticipation of the Fed’s purchase program, which was launched in November.

Also, inflation -- which eats fixed-rate bond returns -- is significantly higher now than last fall: The year-over-year increase in the consumer price index was just 1.2% in October. It was 3.6% last month.

-- Tom Petruno

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