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Treasury bond yields plunge as panicked buyers ignore downgrade

August 8, 2011 |  2:07 pm

U.S. Treasury bond yields dived in Monday’s global market panic as investors rushed to buy, in effect thumbing their noses at Standard & Poor’s downgrade of the government’s debt rating.

In a time of extreme turmoil in markets, investors still are trusting that Treasuries will offer relative safety.

“People look around the world and they don’t know where else to go,” said Charles Comiskey, head of Treasury bond trading at Scotia Capital in New York.

Treass The 10-year T-note yield sank to 2.32%, down from 2.56% on Friday and the lowest since early 2009.

Shorter-term yields also tumbled. The three-year T-note yield slid to 0.42% from 0.49% on Friday.

In a bit of irony, the Treasury saw relatively poor demand at its weekly auction of three- and six-month bills. Analysts said that reflected big investors' desire to lock in longer-term yields.

Over the weekend, many investors had been expecting Treasury bond yields to rise initially because of the rating downgrade, and planned to buy as rates went up, Comiskey said.

But as is often the case in markets, the crowd doesn’t get what it wants.

It also helped the Treasury market, of course, that stock prices collapsed worldwide Monday, putting a huge amount of cash in equity sellers’ hands. They had to invest it somewhere fast.

The Dow Jones industrial average closed down 634.76 points, or 5.6%, at 10,809.85, the lowest since October.

Buyers also flocked to German and Canadian government bonds, among others, as foreign stock markets crumbled. The German DAX stock index sank 5%. Canada’s main share index slid 4%.

Next up for the Treasury market: The Federal Reserve’s meeting Tuesday. The betting is that the Fed isn’t yet ready to announce a new bond-buying program to pump money into the financial system, but that could change if stock markets are in another freefall Tuesday.

The Treasury also will be selling $72 billion in new debt over the next three days: $32 billion in three-year notes Tuesday,  $24 billion in 10-year notes Wednesday and $16 billion in 30-year bonds Thursday.

Those auctions will show whether foreign investors, in particular, still want Treasuries at these low yields.

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U.S. unlikely to get AAA rating back soon, S&P says

-- Tom Petruno

Photo: The Treasury building in Washington. Credit: Andrew Harrer / Bloomberg News

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