Treasury Bond Yields Drop on France Downgrade News

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.

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