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US Treasurys Fight Back With Biggest Gain In Two Weeks

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03/21/2012 | 03:08pm EDT
   By Cynthia Lin 

Investors returned to the U.S. Treasurys market Wednesday, taking advantage of the recent price drop that had pumped yields up to their most attractive levels in months.

The benchmark 10-year Treasury yield, which moves inversely to its price, tumbled eight basis points on the day to 2.292%. That is the biggest one-day yield-decline since March 6, when worries about Greece's debt restructuring deal drove investors into the safety of U.S. government bonds.

These gains reverse part of the sharp selloff that started a week ago after the Federal Reserve made a slight nod to recent improvements in the U.S. economy. Investors took it as a sign that another bond-buying program from the Fed was now less likely, sparking the swift downturn in Treasurys.

Ten-year yields snapped up 0.37 percentage point in the course of a week, hitting a near five-month high of 2.399% Tuesday. These elevated yields helped to lure some buyers back into the safe-harbor market.

"We went too far too fast," said Sean Simko, fixed-income portfolio manager at SEI Investment. He used the price-drop as an opportunity to scoop up more Treasurys. "Taking a step back, U.S. data have been positive, but sustainability is the question."

Apparently at least some other investors did the same as Treasury prices took a one-way ride up Wednesday. By late-afternoon trading, the market sat at session highs with 10-year notes up 22/32 in price to yield 2.292%. The 30-year bond rose 1 13/32 to yield 3.379%, while two-year notes gained 1/32 to yield 0.371%.

These gains offer a welcome break from the recent selling streak. And many analysts cite a new 10-year trading range of 2.1% to 2.4% in the coming months. This is a notch higher than the 1.8% to 2.1% region where these yields were stuck at for more than four months before the past week's selloff.

But while a number of market observers have been nudging up their year-end yield forecasts, they also stress that it doesn't signal the start of a "bond bear market." The Fed still has a heavy hand as a buyer in the market, and there remain many economic uncertainties that can prompt investors to seek out the safety of U.S. Treasurys.

"We have a hard time believing the Fed won't do everything in its power to keep the 10-year Treasury under 2.5%," says Matthew Tuttle, chief investment officer at Tuttle Wealth Management.

David Rolley, international bond fund manager at Loomis Sayles, said oil prices, China's slowdown, Europe's credit crisis and the U.S.'s fiscal situation are on his list of worries. He sees 10-year notes yielding 2.5% to 2.75% at year-end.

Where yields are headed next depends heavily on the Fed's next policy move. Investors will be paying extra attention to Fed officials' remarks for hints about the central bank's stance on the economy. Regional Federal Reserve bank president Charles Evans and James Bullard are scheduled to speak Thursday.

  US Swap Spreads Mixed 

The U.S. two-year swap spread, which measures the difference 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 26.75 basis points. The 10-year swap spread was 0.50 basis point tighter at 7.50 basis points.

    3/4%    2-year    99 24/32   up 1/32      0.371%   -2.4BP 
    1 1/4%  3-Year    99 13/32   up 4/32      0.576%   -4.0BP 
    2 1/4%  5-year    98 24/32   up 10/32     1.136%   -6.6BP 
    2 7/8%  7-Year    97 29/32   up 15/32     1.694%   -7.5BP 
    3 5/8%  10-year   97 13/32   up 22/32     2.292%   -8.0BP 
    4 3/4%  30-year   95  7/32   up 1 13/32   3.379%   -7.9BP 
    2-10-Yr Yield Spread: 192.5BPS v 196.3BPS 

Source: Tradeweb

-By Cynthia Lin, Dow Jones Newswires; 212-416-4403; cynthia.lin@dowjones.com

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