TREASURIES-Prices rise after Russia credit downgrade, rate hike

Fri Apr 25, 2014 11:13am EDT

* S&P downgrades Russia credit rating

* Russia raises interest rates

* U.S. 10-year yields down for a third day

By Gertrude Chavez-Dreyfuss

NEW YORK, April 25 (Reuters) - U.S. Treasury prices rose across the board on Friday, as investors sought the safety of government bonds after Russia unexpectedly raised interest rates hours after the S&P downgraded the country's credit rating.

Despite last week's peace agreement, violence in the eastern part of Ukraine and mounting Russian troop formations just across the border have weighed on risk appetite and kept demand for Bunds and Treasuries intact.

Yields on benchmark 10-year notes, which move inversely to bond prices, fell for a third straight session and currently lodged on the low end of this month's trading range. U.S. 30-year bond yields, meanwhile, were down for a fourth consecutive day.

Investors grew anxious after Standard & Poor's on Friday cut Russia's credit rating to just one notch above junk status and warned more could follow if tighter sanctions were imposed and capital flight, about $64 billion in the first quarter alone, was not stemmed.

Hours after, Russia raised interest rates for the second time in two months to prevent a weakening rouble from stoking inflation.

"Overnight, the flows in Treasuries turned a little bit squarely," said Guy LeBas, chief fixed income strategist, at Janney Montgomery Scott LLC in Philadelphia. "We saw some good buying after the Russia downgrade."

In mid-morning trading, the benchmark 10-year U.S. Treasury note was up 6/32 in price to yield 2.66 percent, down from 2.68 percent late Thursday. Prices of 30-year Treasury bonds were up 15/32 to yield 3.43 percent, compared with 3.45 percent the previous session.

Yields inched lower after data showed the U.S. services sector grew at a slower rate in April than the previous month as job creation stalled, according to financial data firm Markit. It said its "flash" services Purchasing Managers Index hit 54.2 in April compared with March's final reading of 55.3.

But an upward revision on the University of Michigan consumer sentiment index helped provide a floor on yields. The Thomson Reuters/University of Michigan's final April reading on the overall index of consumer sentiment came in at 84.1, beating an expectation of 83.0 in a Reuters survey and up from 80.0 the month before. The preliminary April reading was 82.6. The headline number was the highest reading since July 2013.

"We were expecting a strong number and this was even stronger than that," said Yelena Shulyatyeva, U.S. economist at BNP Paribas in New York. "People feel much happier now that the end of the winter finally came. This year the rebound in sentiment is more pronounced because the winter was so harsh." (Additional reporting by Richard Leong; Editing by Meredith Mazzilli)

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