Treasurys Boosted by Housing Market Woes

AP

U.S. Treasury bond prices fell Tuesday as investors focused on problems in the housing market and forgot their concerns about rising inflation even as the Federal Reserve chief sought to address them.

At 5 p.m. EDT, the 10-year Treasury note was up $9.38 per $1,000 in face value, or 30/32 point, from its level at 5 p.m. Monday. Its yield, which moves in the opposite direction, fell to 5.02 percent from 5.15 percent.

The 30-year bond rose 1 25/32 point. Its yield fell to 5.12 percent from 5.24 percent.

The 2-year note rose 7/32 point. Its yield fell to 4.84 percent from 4.95 percent.

Yields on 3-month Treasury bills were 4.95 percent as the discount rate rose 0.01 percentage point to 4.81 percent.

Such safe-haven buying into government bonds has become a more regular occurrence in recent months amid rising angst over the state of the U.S. housing sector. On Tuesday, investors were frightened by a couple of dire reports from home builder DR Horton and Home Depot and a slew of negative ratings actions on subprime assets by ratings firm Standard & Poor's and Moody's Investors Service.

There's certainly been little else to coax investors into government bonds, with the Federal Reserve widely deemed to be taking a "perma-hold" position on interest rates. Last month marked a year anniversary of the target rate at 5.25 percent, and the central bank's policy statements continue to stress inflationary pressure as the dominant concern.

Tuesday's speech by Federal Reserve Chairman Ben Bernanke to the National Bureau of Economic Research didn't invite much market response as he did nothing to dispel the image of a Fed primarily concerned with keeping inflation expectations in check.

On this point, he ventured only that the public's expectations of inflation remain "imperfectly anchored," and change based on incoming economic news, though the situation is better than it was 20 years ago.

The Fed's bias toward inflation - though perhaps subtler today than it has been in the past - doesn't mean it's ignoring the squeals from the troubled housing sector, which it has described as a potential drag on the economy for sometime to come.

Scott Gewirtz, head of Treasury trading at Lehman Brothers in New York, points out that "the housing market is not about to turn around and be a source of growth anytime soon. The Fed is focused on both things."

TJ Marta, fixed income strategist at RBC Capital Markets in New York said it's worth remembering that recent developments have nothing much to do with the fundamental appeal of Treasurys.

"I think that the market is reacting to issues that probably involve some fraud and negligence and greed and lack of oversight, none of which can be fixed by the Fed cutting 25 basis points," he said.

"The market is going to become fixated on CDOs (collateralized debt obligations), adjustable-rate mortgages resets, declining or moderating consumption, and the Fed is still going to be looking at inflation pressures."