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TREASURIES-Rocky credit markets spark bond-buying spree
July 20, 2007 / 2:38 PM / 10 years ago

TREASURIES-Rocky credit markets spark bond-buying spree

3 Min Read

(Adds comments, updates prices)

By Pedro Nicolaci da Costa

NEW YORK, July 20 (Reuters) - U.S. Treasury debt prices jumped on Friday as ongoing credit worries and weaker stocks allowed bond bulls to test six-week lows in benchmark yields.

A mix of hard data and anecdotal evidence have underpinned a week-long rally. Federal Reserve Chairman Ben Bernanke's testimony, which referred extensively to the problem in the subprime mortgages sector, only added fuel.

Benchmark 10-year notes US10YT=RR surged 20/32 and were offering a yield of 4.96 percent, down six basis points on the day and as many as 15 on the week. Yields were on track for their biggest one-week drop since March.

The U.S. housing debacle now appeared to be affecting investments overseas, with a subprime-heavy Australian hedge fund running into trouble and Standard & Poor's downgrading a series of European debt pools.

At the heart of the rally was the suspicion that rising defaults on risky home loans would continue to ripple through financial markets, possibly leading to a drying up of credit.

"We see serious risk that the much-ballyhooed global growth party may come to an end," said William O'Donnell, head of U.S. interest rate strategy at UBS.

The buying had now taken on a momentum of its own, with a break below key yield levels encouraging more bidders.

"We have plowed through some of these technical levels and there is probably a bit of panic buying," said Andrew Kreicher, a trader at Deutsche Bank.

The data this week was broadly supportive of bonds as well. Permits for residential buildings have collapsed to their lowest in a decade, while home-builder sentiment continues to plummet.

At the margins, fresh measures from the Chinese government to curb rapid economic growth may have helped Treasuries. While tighter lending conditions globally tend to scare off fixed-income investors, slower growth in China could hurt the U.S. expansion, and therefore benefit government debt.

Strength was evident across the yield curve, with two-year US2YT=RR notes soaring 5/32, offering a yield of 4.77 percent, its lowest in two months and down from 4.85 percent on Thursday.

Equity markets provided another boost to government debt, declining considerably on disappointing earnings from Caterpillar and Google.

Additional reporting by Chris Reese

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