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In the latest evidence of the European debt crisis’ impact here in the U.S., Treasury bond yields declined more than five basis points today on news that Standard & Poor’s is preparing to downgrade the credit ratings of both France and Austria.
The 10-year and 30-year Treasury bonds are each down seven basis points. The 10-year Treasury note fell to 1.86% yield from 1.93%; the 30-year bond dropped to 2.9% yield. Prices are up for U.S. bonds, and as prices rise, the yields fall.
France’s finance minister confirmed today that Standard & Poor’s plans to slash France’s credit rating from its current AAA status, much like it did in downgrading the U.S. credit rating back in August. Several other governments in cash-strapped Europe, including Austria, are also on the brink of being downgraded. But France is the second-largest economy in Europe, so it’s the credit downgrade that is truly reverberating around the world.
The yield drop is an about-face from yesterday for the 30-year bonds. Yields were up slightly to 2.99% on Thursday as prices dropped after a weaker-than-expected bond auction.
Today’s price hike continues last year’s upward trajectory for 30-year bonds. The bonds appreciated an almost unheard of 20% in 2011.
Our own Kevin McElroy insists that the latest price increase for Treasury bonds is just a blip on the radar screen. As Kevin wrote in a Daily Profit article last week, the current pace of Treasury bond price gains is unsustainable for an investment that is historically viewed as a safe haven.
“Safe investments don’t return 20%,” Kevin wrote. “So either this safe investment has broken all the rules, or it’s not safe. … Right now the 30-year U.S. Treasury is acting like a junk bond.”
In other words, don’t let today’s price hike fool you. Eventually, 30-year Treasury bonds are due for a fall – regardless of France’s credit rating.