(Recasts, updates prices, adds new comment, yield curve details)
* 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) - Yields on U.S. 30-year bonds fell to their lowest in more than nine months on Friday, sliding for a fourth straight session, as investors sought the safety of bonds after Russia unexpectedly raised rates hours after the S&P downgraded the country’s credit rating.
The gap between short- and long-term interest rates, mainly the spread between yields of 5-year notes and 30-year bonds, also contracted on Friday to its narrowest since October 2009. Some strategists said this flattening of the yield curve could suggest the market sees the U.S. economy slowing.
For the short term, however, the focus has been on the tension between Russia and Ukraine.
Despite last week’s peace agreement, violence in the eastern part of Ukraine and mounting Russian troop formations across the border have weighed on risk appetite and kept demand for German Bunds and Treasuries intact.
Compounding the flight to safety, Wall Street shares tumbled on weaker-than-expected results from bellwether names Amazon.com and Ford Motor Co.
As a result, yields on benchmark 10-year notes, which move inversely to bond prices, fell to a one-week low and are currently lodged on the low end of this month’s trading range.
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 was not stemmed.
Hours after, Russia raised interest rates for the second time in two months to prevent a weakening rouble from stoking inflation.
“We had a mixed picture on earnings today that resulted in weakness in equity markets,” said Dan Heckman, senior fixed income strategist at US Bank Wealth Management in Kansas City. “Add Russia to the mix and we saw a fairly good amount of bids for Treasuries.”
In late 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 rose 13/32 to yield 3.44 percent, compared with 3.45 percent the previous session.
The five-year note, meanwhile, edged up 2/32 in price to yield 1.7 percent. The difference between yields of five-year notes and that of 30-year bonds was 1.7138 percentage points, according to Reuters data, the smallest since October 2009 .
A flat yield curve could mean several things, but for U.S. Bank’s Heckman, it could suggest impending softness in the economy.
“The bond market may be correctly sniffing out that the upcoming economic data may show a little bit of weakness,” said Heckman. “We’ll probably get a rebound and snapback off the weather, but once that occurs, we may not get sustainable growth and I think that’s what the bond market is starting to get a sense of.”
The curve also flattens when short-term rates rise on the expectation the Federal Reserve will lift interest rates. (Editing by Chizu Nomiyama)