Korean tensions, Europe worries spur safety buying

By Emily Flitter

NEW YORK (BestGrowthStock) – U.S. Treasury debt prices climbed on Tuesday as tensions on the Korean peninsula and worries over fiscal troubles in Ireland and Portugal spurred flight-to-safety buying.

North Korea fired scores of artillery shells at a South Korean island, killing two soldiers. South Korea fired back and sent fighter jets to the area, close to a disputed maritime border on the west of the divided peninsula.

Stock prices fell sharply as investors fled riskier assets for the haven of U.S. government debt.

Buying was supported by worries over possible contagion from debt troubles in Europe, where Ireland’s government was struggling to pass an austerity budget, and on concerns Portugal may also need an aid package.

Price gains faded slightly after an auction of $35 billion of five-year U.S. Treasury notes was weaker than expected.

“There seems to be a pretty good underlying bid in the (Treasury) marketplace given all of the factors coming out of Europe and Korea,” said Marty Mitchell, chief market technician at Stifel Nicolaus in Baltimore. “It just feels, with the Dow down triple digits … that’s leading to some safety bidding.”

Mitchell added that while prices pulled away slightly from their highs following the five-year note auction, the effects of the auction reaction faded quickly.

The auction was part of $99 billion of coupon supply this week. The high yield at the auction was higher than the yield at which comparable securities were trading simultaneously in the open market, and the percentage of indirect bidders, mostly foreign central banks, was smaller than normal.

“I think the tail was a bit larger than most had expected,” Mitchell said, referring to the difference between the auction high yield and the open market yield.

“Typically what you’ll see in a Dutch auction is the market back up to test that stop as support to see if it holds, and it looks like we have so far,” he said of the slight price drops visible after the auction.

Benchmark 10-year Treasury notes were last trading 9/32 higher in price to yield 2.77 percent, down from 2.81 percent late Monday.

The 30-year bond briefly traded over a point higher in price late on Tuesday morning as the euro reached the lowest since late September versus the dollar It was last trading 16/32 higher in price to yield 4.18 percent from 4.21 percent late Monday. The yield dipped to as low as 4.15 percent, the lowest in two weeks.

Investors fear Portugal could be the next weak link in the euro zone, and a bailout candidate, due to its rising debt servicing costs and weak economy.

Spreads between German debt yields and Irish, Portuguese and Spanish debt yields widened on Tuesday.

“It is a continuation of the morning rally with concerns over the situation in Korea, but probably more than that is the widening in European government bonds — you are seeing dollar-related buying,” said Rick Klingman, managing director of Treasury trading at BNP Paribas in New York.

Safety buying also spurred interest in the shorter-dated end of the Treasury curve, as two-year Treasury notes traded with a yield of 0.46 percent, down from a high yield of 0.52 percent in Monday’s auction of $35 billion of the notes.

The Treasuries market was little affected by data showing the U.S. economy grew faster than previously estimated in the third quarter. Gross domestic product was revised up to an annualized rate of 2.5 percent from 2.0 percent, with exports and consumer and government spending stronger than originally thought.

A larger-than-expected dip in October U.S. existing home sales also had little effect on trading.

(Additional reporting by Chris Reese and Richard Leong; Editing by James Dalgleish)

Korean tensions, Europe worries spur safety buying