U.S. Treasury debt prices rose for a third straight day on Tuesday after data showing the first drop in housing starts since January reinforced the view that the housing sector would remain a drag on the economy.
Benchmark bond yields, which move inversely to prices, slipped to their lowest levels in a week as weaker stocks and gains in euro zone government bonds also attracted investors to Treasuries, analysts said.
What is helping the Treasury market is this idea that housing is remaining a very big risk to the economy. The figures today in many eyes reinforce that, said Tony Crescenzi, chief bond market strategist with Miller, Tabak & Co. in New York.
Government data showed housing starts fell by 2.1 percent in May, roughly in line with expectations.
The housing figures support the idea of the Fed on hold (on interest rates), while the (bond market's) fear has been of moving toward a hike, Crescenzi added.
U.S. interest rate futures rose after the housing data, suggesting that traders are no longer factoring in a slight chance the Fed will raise rates by the end of the year and are more inclined to bet on the minor prospects for a cut.
In the cash market, Treasury prices have stabilized from last week's sharp sell-off.
Benchmark 10-year notes were up 10/32 in price for a 5.09 percent yield, compared with 5.14 percent late on Monday.
Since rising to a five-year peak last week, 10-year yields have fallen more than 17 basis points over five sessions.
The U.S. housing industry has been an economic weak spot, made worse by the lingering effects of the subprime mortgage crisis. The recent jump in mortgage rates could deepen the sub-prime fallout, as measured by spikes in loan defaults and home foreclosures, analysts said.
Home builders, who have been facing slowing sales and heavy inventories since last year, have scaled back construction.
On Monday, the National Association of Home Builders said its housing market index in June fell to the lowest level since February 1991, the trough of the last housing cycle.
Dallas Fed economist John Duca cautioned that the housing slump could be prolonged by lenders cutting back loans to sub-prime or riskier borrowers, according to an interview posted on the bank's Web site.
Wall Street is also feeling the sub-prime squeeze.
Private equity giant Blackstone Group was to present a plan on Tuesday to rescue a Bear Stearns Cos. hedge fund that is on the brink of collapse, people familiar with the situation said.
Worries about losses at the Bear Stearns fund and the softer housing starts reading sent the main gauge of subprime mortgage bonds to a record low early on Tuesday.
Worries about the hedge fund added to investors' broad concerns about the housing market, helping Treasuries, said Matthew Moore, economic strategist with Banc of America Securities in New York. Investors buy U.S. government bonds when they see signs of weakness in the economy.
Mortgage market participants who had sold Treasuries as yields rose last week may have been buying them back this week, Moore said.
However, the housing weakness has not spilled into other areas of the economy and changed the Fed's primary objective of containing inflation, analysts said.
Two-year notes were up 2/32 in price for a yield of 4.97 percent, down from 5.00 percent late on Monday.
Five-year Treasury notes traded up 6/32 in price to yield 5.01 percent, versus 5.06 percent late on Monday.
The 30-year bond was up 20/32 in price for a yield of 5.21 percent, versus 5.25 percent late on Monday.