U.S. debt prices rise amid deflation fears

By Emily Flitter

NEW YORK (BestGrowthStock) – U.S. Treasury prices rose on Monday, with the 10-year yield hitting a 17-month low as weak economic growth around the world spurred talk of deflation.

Traders were greeted Monday morning with news that Japan’s second-quarter economic growth was far weaker than expected. U.S. stocks (Read more about the stock market today. ) initially slipped, boosting Treasury prices even higher, before edging into positive territory.

“The phrase du jour is going to be ‘deflation’ and it’s not only going to last for a day but for some time,” said Christian Cooper, senior rates trader at Jefferies & Co in New York. “There’s real concern that without further stimulation of the economy the overall weakness could lead not only to a double dip but to outright price deflation … it may be an actual event as opposed to a concern.”

The 30-year Treasury bond gained two points; its yield touched a 16-month low.

Robert Tipp, chief investment strategist at Prudential Fixed Income in New York, noted that Treasuries’ latest rally had forced the 30-year yield below an important level — 3.80 percent — and predicted a sustained run for the 30-year at a yield under 4 percent for “the coming weeks if not months.”

“I think that while initially the rally in the market, looking back a few months, was related to flight-to-quality … now we’ve moved on,” Tipp said. “Now inflation is not likely to be a threat; investors are looking for income and stability of principle and they’re reaching out on the curve.”

Tipp added that yields would likely not return to the averages of previous decades. The 10-year yield from December 1990 to December 2000, he noted, averaged 6.4 percent. For the following five years it was 4.4 percent.

While expectations of an economic slowdown and deflation accounted for some of the demand for Treasuries, analysts also saw supply-and-demand dynamics adding to the bid in the long end.

“There’s a big reach here for longer-term yield and that is what’s driving the Treasury market,” said Todd Colvin, vice president at MF Global in Chicago. “You’ve got money, you need to park it somewhere, and the five-year note doesn’t get you anything.”

Rick Klingman, managing director of Treasury trading at BNP Paribas in New York, said most of the day’s activity was in the long end of the curve.

“You have a lot of real money investors — pension funds and insurance companies — that are being forced into the long end of the market,” he said.

Treasury purchasing by central banks and by Japanese buyers was vigorous overnight, according to a note to clients from John Briggs, Treasury strategist at RBS Securities in Stamford, Connecticut.

“Government bonds across the globe are benefiting from both the peripheral Europe concerns and the growth slowdown,” he wrote.

In the United States, a worsening economic slowdown made longer-dated U.S. debt a surer bet, increasing demand for 10-year notes and 30-year bonds.

The 30-year bond was trading 1-30/32 points higher in price and yielding 3.75 percent, down from 3.86 percent at Friday’s close.

The benchmark 10-year note traded 21/32 higher in price to yield 2.60 percent, down from Friday’s close of 2.67 percent and the lowest since March 20, 2009.

(Editing by Dan Grebler)

U.S. debt prices rise amid deflation fears