May 21, 2009 / 7:06 PM / 11 years ago

TREASURIES-Bonds plunge as U.S. assets come under pressure

* U.S. assets the focus of selling

* Worry US may be in same boat after S&P cuts UK outlook

* Dollar lowest this year against basket of currencies

* Stocks fall as long slog seen to economic recovery (Adds comment, updates prices, changes byline)

By Ellen Freilich

NEW YORK, May 21 (Reuters) - U.S. Treasuries tumbled on Thursday, giving yields their biggest single-day jump in two weeks, when U.S. assets came under pressure from fears that the United States was at risk of losing its AAA credit rating.

Responding to a question via email to Reuters, Bill Gross, co-chief investment officer of bond fund manager Pacific Investment Management Co., said market fears that the United States is at risk of losing the top credit rating led to selling of the U.S. dollar, stocks and bonds on Thursday.

Gross told Reuters that investors feared the United States is “going the way of the UK — losing AAA rating which affects all financial assets and the dollar.”

Standard & Poor’s announcement that it could downgrade Britain’s triple-A credit rating reminded investors that Britain was not the only nation facing big fiscal challenges, traders said.

A sharp decline in the stock market would typically revive a safety bid for U.S. Treasuries, but several factors besides concerns about U.S. fiscal health worked against that dynamic.

Benchmark 10-year Treasury notes US10YT=RR fell nearly one-and-half points in price, their yields rising to 3.37 percent - the highest yield on an intraday basis in nearly two weeks - from 3.20 percent late on Wednesday.

Some traders cited disappointment with the New York Federal Reserve’s purchase of $7.398 billion of Treasuries maturing September 2013 to February 2016 on Thursday.

Dealers had submitted $45.694 billion of bids for consideration in the purchase, the third this week, and the Treasury’s purchase was just slightly higher than the $7.025 billion in a similar operation on April 27.

Since late March, the U.S. central bank has purchased almost $123 billion in U.S. government debt, part of a $300 billion six-month program it has instituted to try to restrain long-term borrowing costs to help end the recession.

Stone & McCarthy Research Associates economist Ward McCarthy in Princeton, New Jersey said Treasuries also reversed some of the short-covering rally that occurred on Wednesday. The short-covering followed headlines that Federal Reserve officials had discussed in April the possibility of expanding purchases of assets, including Treasuries.

“This was just common sense and shouldn’t have been a big deal for the market,” McCarthy said.

“When Treasuries prices failed to break above the top end of an established channel, yesterday’s short-covering rally became today’s panic selling,” he said.

The Treasury’s announcement that it would sell $101 billion in two-, five- and seven-year notes next week brought supply concerns back into the picture after a couple of weeks without Treasury auctions. This, too, weighed on Treasuries prices.

The Treasury is expected to issue about $2 trillion of debt in fiscal 2009. Benchmark yields have risen about a full percentage point since early January.

The weakening of the U.S. dollar fed the pressure on U.S. assets like stocks and Treasuries, said Dominic Konstam, head of interest-rate strategy at Credit Suisse in New York.

“Foreign investors are less willing to buy the long end,” he said. Also, if investors are less interested in buying the dollar as a safe-haven trade because the economy is nearing the end of its sharp declines, then people have to ask whether Treasury yields are too low and need to rise, Konstam said.

The 30-year bond US30YT=RR tumbled two-and-a-half points, its yield rising to 4.31 percent from 4.16 percent on Tuesday.

The weakness came despite data hinting the U.S. recession may be far from over.

Weekly U.S. jobless claims on Thursday, while near economists’ expectations, offered little hope for an imminent end to the recession, while continued claims for unemployment benefits extended their record rise.

“The Achilles’ heel of recovery is the labor market, which could put consumer spending under renewed downward pressure and spur another round of inventory liquidation,” said RDQ Economics’ John Ryding and Conrad DeQuadros in New York.

Data also showed a faster-than-expected contraction in manufacturing in the U.S. Mid-Atlantic region in May.

The Philadelphia Fed bank said its business activity index for May was minus 22.6 compared with minus 24.4 in April. (Additional reporting by Jennifer Alban and Chris Reese; Editing by Kenneth Barry)

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