10-Yr Treasury Yield Posts Biggest Weekly Drop Since 2009

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• AUGUST 5, 2011, 5:18 P.M. ET

10-Yr Treasury Yield Posts Biggest Weekly Drop Since 2009

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   By Min Zeng 
   Of DOW JONES NEWSWIRES 
 

NEW YORK (Dow Jones)--As the jittery financial markets regained some poise Friday, safe-haven Treasury bonds got hit by a selloff that carved a dent in the sector's relentless five-session rally.

But despite the setback, the bond market posted strong price gains for the week, with the benchmark 10-year price notching its biggest weekly gain since August 2009. In contract, U.S. benchmark stock indices suffered their biggest weekly decline since October 2008.

Market participants from money funds and hedge funds to foreign central banks have been piling into Treasurys on heightened fears about the global economic outlook and the euro zone's debt crisis. Their mass buying sent yields, which move inversely to prices, tumbling across the board.

The two-year note's yield hit a record low Thursday and overnight the benchmark 10-year note's yield dropped to its lowest level since October, a month before the Federal Reserve launched its $600 billion Treasury bond-buying program to stimulate the economy.

The bull run hit a skid Friday when an upbeat U.S. jobs report and some hints of progress in the euro-zone's debt troubles gave investors an excuse to book profits from the frothy market. Some bond dealers also sold Treasurys ahead of next week's $72 billion in new government debt supply.

Some traders say the one-session setback will be temporary. They say that the global economic sentiment turned sharply bearish this week, and any fresh negative headlines on the euro zone's debt problems or global economic issues will spur new demand for Treasurys.

"It is just a short-term relief," said Abdullah Karatash, head of U.S. fixed income credit trading at Natixis in New York. "Europe's sovereign woes are not going away anytime soon, the domestic macroeconomic backdrop will not change overnight and the Middle East could easily light up???flight to quality is the name of the game this year."

In late afternoon trading, the benchmark 10-year note was 30/32 lower, pushing the yield up to 2.563%. It fell to 2.334% over night, tumbling by about 25 basis points since the end of last week. Karatash said the yield could fall below 2% in coming months if risk aversion intensifies.

The 30-year bond was the week's top performer, moving 2 12/32 lower to yield 3.845%, as near-zero yields on short-dated Treasurys pushed investors to seek extra returns in the longest maturity. The long bond's yield plunged nearly 30 basis points for the week, the most since December 2008.

Sean Simko, who oversees $7 billion in fixed-income assets at SEI Investments Co. in Oaks, Pa., says Friday's better-than-expected non-farm payrolls report decreases the chances that the Fed will institute a third-round of its Treasury bond-buying program, giving the Fed "some breathing room" going into next week's monetary policy meeting.

He says that current low yields "aren't justified for where we are in the economy," and that 10-year yields will soon climb back to 2.75%. "I think that what we're seeing is just speculation based on uncertainty."

US Swap Spreads Widen 

U.S. two-year swap spread, which measures the differential between the two-year swap rate and two-year Treasury yield and is a main gauge of credit risk, widened by 0.25 basis point to 25.5 basis points. The 10-year swap spread was 1.75 basis points wider to 17.25 basis points.

COUPON   ISSUE    PRICE       CHANGE     YIELD     CHANGE 
3/8%     2-year   100 5/32    dn 1/32    0.292%    +1.2BP 
5/8%     3-Year   100 12/32   dn 5/32    0.496%    +5.6BP 
1 1/2%   5-year   101 6/32    dn 19/32   1.252%    +12.0BP 
2 3/8%   7-Year   102 5/32    dn 25/32   1.916%    +11.9BP 
3 1/8%   10-year  104 26/32   dn 30/32   2.563%    +10.5BP 
4 3/8%   30-year  109 11/32   dn 2 12/32 3.845%    +12.5BP 
2-10-Yr Yield Spread: +227.1 BPS Vs +237.3 BPS