By Min Zeng
Investors sought safety in U.S. Treasury bonds on Tuesday,
driven by concerns over the potential for Greece defaulting on its
debt.
In recent trading, the yield on the benchmark 10-year Treasury
note was 2.186%, compared with 2.211% on Friday, according to
Tradeweb.
Bond prices rise as their yields fall. The bond market was shut
Monday for the Memorial Day holiday.
A string of U.S. data kept the bond market's price gain in
check. Durable goods for April fell by a larger-than-forecast 0.5%,
but details offered some positive sign on business investments. New
home sales increased and a monthly gauge of consumer sentiment
toward the growth outlook brightened.
A $26 billion sale of two-year Treasury notes is due at 1 p.m.
Tuesday, followed by a $35 billion sale of five-year notes on
Wednesday and a $29 billion sale of seven-year notes on
Thursday.
For months, Greece's government and its international creditors
have been stuck in drawn-out negotiations over terms for funding.
The deadline for cash-strapped Greece to repay loans to the
International Monetary Fund is due early next month.
Reflecting the worries, Greek government bonds sold off Tuesday,
sending the yield on the 10-year Greek bond higher by over 0.4
percentage point to 11.9%.
"Greece is quickly approaching the day of reckoning," said Larry
Milstein, head of government and agency trading at R.W. Pressprich
& Co. in New York. "If Greece leaves the eurozone, it could
roil the market for a time and lead to a safety bid to Treasury
bonds."
Contagion has been contained over the past few months. Some
investors still expect a deal to be reached to avoid a default.
Meanwhile, the European Central Bank has been buying bonds since
March to support the economy and investors say this monetary
backdrop would help contain the risk of spillover.
Tuesday, the yield on the 10-year government bond in Spain rose
by 0.1 percentage point to 1.881%. The yield remains near a record
low.
Still, some investors are prepared for a worse outcome.
Mark Dowding, co-head of investment-grade debt at BlueBay Asset
Management, which oversees $62.9 billion of assets, said he has
reduced holdings of eurozone's government bonds anticipating a rise
in volatility.
"The risk of a default occurring in the next month is as high as
50%," said Mr. Dowding. "Were this to occur, we expect there to be
meaningful volatility in markets as investors worry about the
stability of monetary union."
Another big focus for bond investors has been when the Federal
Reserve will start raising short-term interest rates.
A major shift by the central bank into a tightening mode for the
first time since 2006 would send prices of outstanding bonds lower
as higher policy rates make newly sold bonds more attractive to
buy.
Bond investors have benefited from a strong price rally in the
bond market since the start of 2014. But the recent bond-market
rout underscores that with bond yields near historical lows, even a
moderate rise in yields would chip away the slim interest payments
and inflict pain on bondholders.
The 10-year Treasury yield increased by 0.07 percentage point
for the week. The yield touched 2.366% earlier in May, the highest
intraday level since November. It was 2.173% at the end of
2014.
Federal Reserve Chairwoman Janet Yellen reiterated Friday that
the central bank is on track to raise interest rates sometime this
year. Ms. Yellen continued to expect the U.S. economy to rebound
from a soft patch during the first quarter.
Mixed economic releases over the past few weeks have raised the
question over how robustly the U.S. economy is rebounding. Many
investors expect the Fed to wait until late this year to raise
interest rates.
Some traders caution that the Fed may raise rates sooner than
many investors expect, a case that would rattle the bond market and
send yields climbing.
Write to Min Zeng at min.zeng@wsj.com