The dire Greek sovereign-debt problem deteriorated further Friday, sending many investors into safe-haven Treasurys. Fitch cut Greece's credit ratings Friday to B-plus—four steps below investment grade—and placed the country on negative watch. Also, French Finance Minister Christine Lagarde warned that Greece is at risk of default if it doesn't do more to bring its public finances into order.
"People are worried that there could be a major default in Greece and policy makers are facing a tough challenge putting the debt problems under control," said Michael Franzese, head of Treasury trading at Wunderlich Securities in New York. "That has pushed investors into Treasurys for safety and stability."
Yields on some short-dated Greek government bonds traded above 20% over fears Greece may restructure its debt, potentially forcing bond holders to accept losses.
In late afternoon trading, the benchmark U.S. Treasury 10-year note was 5/32 higher to yield 3.152%. Bond yields move inversely to their prices. The yield fell from 3.186% a week ago, and the note's price posted a weekly gain.
The 30-year bond was 3/32 higher to yield 4.300% and the two-year note was 1/32 higher to yield 0.515%.
The bond market's strength was diluted by some selling ahead of new government and corporate debt sales on tap next week.
Many companies are slated to sell new debt next week to lock in low interest rates in the wake of a recent fall in Treasury yields. Companies typically sell Treasurys to hedge against the risk of higher interest rates when pricing new debt.
Also, the Treasury Department plans to sell $99 billion in new Treasury notes next week.
The Treasury market has rallied significantly in the past few weeks. The 10-year note's yield fell to a five-month low of 3.09% on May 18 as a result of worries about the struggling U.S. economy and the euro zone's debt problems.
A stream of disappointing U.S. data—including housing and manufacturing reports—raised anxiety that the U.S. economy could lose traction in the second half after the Federal Reserve completes its $600 billion Treasury bond-buying program.
The Fed's purchases fueled a strong rally in stocks and commodities earlier this year. But in recent weeks, many riskier assets have fallen as the bond-buying program draws near its end.
"There is uncertainty about the euro zone and the volatility in many commodities is a precursor" that more longs, bets on gains in financial assets, will be flushed out, which will support demand for safe-haven Treasurys, said Russ Certo, head of rates trading at Gleacher & Co.
Tom Tucci, head of U.S. government bond trading in New York at RBC Capital Markets LLC, said he has bought Treasurys amid the recent rally. While the bond market faces risk of some bouts of profit-taking, he said the 10-year yield will stay in a range of 3% to 3.25% with a chance to break below 3%.
But other traders said the yield is unlikely to trade below 3% unless U.S. data in coming weeks come in shockingly weak, stocks and commodities undergo another steep selloff or the euro zone's debt situation suffers another scare.
Separately, the U.S. two-year swap spread—which measures the differential between the two-year swap rate and two-year Treasury yield and is a main gauge of credit risks—was 0.25 basis point wider at 19.75 basis points. The 10-year swap spread was 0.25 basis point wider at 9.25 basis points.
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