April 30, 2012 / 8:11 PM / 6 years ago

TREASURIES-Bonds gain on concern over US, Europe growth

* Treasuries set highest gain among US bonds in April
    * Euro zone worries grow as Spanish economy shrinks
    * U.S. Midwest business data weaker than expected
    * Month-end index buying seen adding bids for bonds

    By Ellen Freilich	
    NEW YORK, April 30 (Reuters) - U.S. Treasury debt prices
rose on Monday as anxiety over economic weakness in Europe and
slower growth in the United States led investors to favor
lower-risk investments over stocks and other risky assets.	
    The pattern of weaker-than-expected U.S. economic data and
consequent lower yields on the last day of the month was the
narrative in a nutshell for the U.S. Treasury market all month.	
    That story of slower U.S. growth and worries about Europe
allowed the U.S. benchmark 10-year yield to fall from 2.31
percent in the earliest trading sessions of the month to 1.93
percent late on Monday, a fall of nearly 40 basis points and its
biggest monthly drop since last September.	
    "For Treasuries, this month was a fast-forward version of
what we saw in the second half of last year which was that a
relatively sunny first half of 2011 suddenly went dark and the
Federal Reserve quickly shifted into quantitative easing mode,"
said Robert Tipp, chief investment strategist for Prudential
Fixed Income that has more than $330 billion in assets under
management. "And 2011 was the second year in a row that a
seemingly bright start to the year came unraveled by the fall."	
    Twice burned, the financial markets took to heart the
weaker-than-expected March U.S. non-farm payrolls report
released in early April.	
    "That, along with ongoing trouble in Europe, seemed to be
all the market needed to assume we would get a replay of the
2010 and 2011 third-quarter script which was lower interest
rates and a flight to quality," Tipp said.	
    On Monday, a weaker-than-expected private-sector report on
business activities in the Chicago region in April fed concern
that the world's largest economy was experiencing a spring
growth deceleration for a third straight year, one that could
prompt more large-scale bond purchases by the Federal Reserve.	
    The Institute for Supply Management-Chicago said its index
of Midwest business activity fell to 56.2 in April, the lowest
since November 2009. 	
    "Growth is beginning to fade around the world," said Justin
Hoogendoorn, fixed income strategist at BMO Capital Markets in
    Overseas worries were reflected in the bond market as well.
Concern about Europe slipping into a recession intensified after
Spain's economy contracted in the first three months of the
year. Spain's fiscal woes deepened after Standard & Poor's cut
the credit ratings of 11 Spanish banks on Monday following its
downgrade of Spain last week. 	
     "While you're on this kind of steep incline, you're
unlikely to see Treasury rates break higher," said Tipp.
"There's just too much downside risk on the global investment
    On below-average trading volume, benchmark 10-year notes
 traded up 5/32 in price to yield 1.93 percent.
Thirty-year bonds rose 6/32 in price, their yields
easing to 3.12 percent from 3.13 percent at Friday's close and,
sharply, from 3.44 percent in early April.	
    Bets grew that there would be more central bank help to
avert a recession across Europe. Treasuries slightly lagged
German Bunds with their 10-year yield premium over 10-year Bunds
 widening about 1 basis point near 25 basis points.	
    Purchases from fund managers to rebalance their portfolios
at month-end should keep benchmark yields at their lowest levels
since early February, analysts said.	
    "Everyone knows the negatives. No one sees the answers yet,"
said Carl Kaufman, portfolio manager at Osterweis Capital
Management in San Francisco, which oversees about $5 billion.	
    Treasuries staged a comeback in April - pushing prices
higher and yields lower - on revived worries about the festering
euro zone debt crisis and signs of slowing U.S. economic growth.	
    Through Friday, Barclays' Treasuries total return index has
risen 1.38 percent in April, making it the best U.S. bond
category in April. It also wiped out its first-quarter loss,
bringing its year-to-date result into positive territory.	
    Another supportive factor for longer-dated Treasuries is the
ongoing purchases from the Federal Reserve for "Operation
Twist," which is its $400 billion program aimed to hold down
mortgage rates and other long-term borrowing costs.	
    The Fed said on Monday it will buy about $45 billion worth
of Treasuries and sell about $43 billion of Treasuries in May.	
    While the recent spate of disappointing data on the U.S. and
Europe has supported demand for Treasuries, analysts said the
figures are not dire enough to push yields into a new, lower
trading range because longer-term inflation expectations have
remained in line with the Fed's implicit target of 2 percent.
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