Treasury yields fall to 1-month low

NEW YORK (MarketWatch) � Treasury prices rose modestly Tuesday, pushing yields back to one-month lows and extending a move from Friday after Standard & Poor�s said it had downgraded several European countries.

In morning action, bonds had come under pressure due to good demand at some European debt auctions and stronger euro-zone and Chinese economic data.

Yields on 10-year notes 10_YEAR , which move inversely to prices, fell 2 basis points to 1.85%, after rising to 1.91% in U.S. morning activity. A basis point is one one-hundredth of a percentage point.

Thirty-year-bond yields 30_YEAR �slipped 2 basis points to 2.89%, near their lowest levels this month.

Yields on 2-year notes 2_YEAR �fell 2 basis points to 0.21%, touching their lowest levels since September.

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Bond markets were closed Monday in observance of Martin Luther King Jr. Day.

On Friday, S&P�s downgrades of European countries pushed U.S. 10-year yields to their lowest closing level since mid-December. Read about Treasury market on Friday.

�Treasurys rallied appreciably last week on flight-to-quality flows as further rating downgrades of euro-zone nations by S&P dampened sentiment,� said George Goncalves, head of U.S. rates strategy for Nomura Securities. �The air of caution could persist for several more days as investors remain mired in concerns over Europe.�

However, the firm remains mildly bearish on bonds, saying �current levels are fairly stretched relative to continuing resilience in economic data.�

Small investors cautious

He also noted that data on mutual-fund flows from the Investment Company Institute �show an unbroken streak of weekly net withdrawals from equity funds since September, reflecting cautious retail-investor sentiment. In contrast, bond funds have seen sizable inflows during this period, despite range-bound rates.�

Bonds came under pressure during Asian trading after China said its economy grew at a faster-than-forecast 8.9% in the fourth quarter. Also, an economic-sentiment survey in Germany came in better than expected. Read about China�s GDP.

�Treasurys were lower overnight on the positive economic sentiment generated by the stronger-than-expected Chinese GDP print,� said bond strategists at CRT Capital Group

Also, Spain saw its borrowing costs fall at a bill auction despite its credit downgrade last week.

Treasury prices remained lower after the New York Federal Reserve�s Empire State manufacturing index jumped more than expected in January. See story on Empire State index.

All that helped U.S. stocks gain, though they came off their highs. The S&P 500 index SPX �rose 0.2%. See more on U.S. stocks.

Equities are on the rise and spreads between peripheral European bond yields and benchmark ones have been narrowing �as risk appetite continues to rise, and we expect this scenario to continue,� said Richard Gilhooly, U.S. director of interest-rate strategy at TD Securities.