August 24, 2010 / 4:25 PM / 10 years ago

TREASURIES-US bonds buoyant on economic fears

* Bonds soar on return of economic fear; later trim gains

* Dismal housing data the latest sign of weakness

* Long bonds up 2 points, yields hit 16-month low

* 10-year notes up a point, yields hit 17-month low (Adds details, quote, latest prices)

By Burton Frierson

NEW YORK, Aug 24 (Reuters) - U.S. Treasuries soared on Tuesday, sending two-year yields to yet another record low, as dismal housing data appeared to confirm investor fears the economic recovery was dying in the cradle.

Sales of existing U.S. homes dropped a stunning 27.2 percent in July, accelerating an overnight bond-market rally fueled by stock market losses and worries over the fate of the global economy.

Short-dated debt rose briefly but economic fears also drove more investors into the longer end of the yield curve as they searched for safe returns in a time of negligible growth.

Such concerns were evident across asset classes, including foreign currency markets, with the safe-haven Japanese yen hitting a 15-year high against the dollar JPY=. Profit-taking later prevailed in the bond market.

“Home sales data kind of says it all. Much worse than expected. We got another good strong run in Treasuries on safe-haven flows,” said Kim Rupert, managing director of global fixed income analysis at Action Economics LLC in San Francisco.

The gains pushed benchmark 10-year notes US10YT=RR up a point on the day but they later moderated those gains to stand 20/32 higher, yielding 2.53 percent.

Earlier gains pushed yields down as far as 2.47 percent, marking the lowest 10-year yield since March 2009. The short-lived break below 2.50 percent also appeared to have triggered the profit taking that some had expected from such a move.

“It’s hard to chase these things as they make new price highs,” Rupert said about the retreat from the day’s earlier price highs.

“A lot of times the market will do that. It will just kind of penetrate for a bit, test the waters, see some profit taking and then wait for another day.”

The 30-year long bond US30YT=RR gained more than two points on the day but later pulled back from its peaks to stand 1-1/32 higher on the day, yielding 3.61 percent, as stocks came off their lows of the day.

Long bond yields fell as far as 3.54 percent, their lowest since early April 2009.

Prices rose as the market prepared for a $37 billion auction of two-year Treasury notes at 1 p.m. (1700 GMT).

Two-year notes US2YT=RR were under-performing, trading flat on the day to yield 0.48 percent, though earlier gains resulted in a record-low yield of 0.45 percent, according to Reuters data.

Their under-performance was also evident on the yield curve, which narrowed to its flattest since April 2009 based on the difference between two- and 10-year yields.

It remained to be seen whether this under-performance would be enough to attract buyers at the auction, especially given the historically high prices.

Reporting by Burton Frierson; Editing by Andrew Hay

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