Bonds climb as investors flee stocks

30-year Treasury prices rise more than a point as risk aversion slams global equities.

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NEW YORK (Reuters) -- Treasury debt prices climbed Monday, with the 30-year bond gaining more than a point as stocks fell sharply, burnishing the safe-haven appeal of government debt.

As investors fretted whether the global economy could stage a lasting recovery,U.S. stocks took their cue from falling equities in Europe and Asia.

In the United States, "there is a lot of skepticism about the consumer and whether the second half growth is sustainable," said Josh Stiles bond strategist and managing director with IDEAglobal in New York. "For now, I expect sentiment to shift back from stocks to (government) bonds," Stiles said.

The benchmark 10-year note's price was trading 25/32 higher for a yield of 3.48%, down from 3.58% late Friday. Yields fell as far as 3.47% Monday, the lowest in nearly a month.

"Markets, which had acted with exuberance at the prospect that much of the economic collapse had ended, are apparently making a more sober assessment of the reality of the recovery that is evolving," said T.J. Marta, market strategist with Marta on the Markets in Scotch Plains, N.J.

The Dow Jones industrial average (INDU) closed down about 1.9% to 9,145 points, according to early tallies.

While many economists expect that the U.S. economy is now emerging from the recession that started in December 2007, many fear that growth will falter late this year or early next once the impact of government fiscal stimulus measures fades.

Bonds fleetingly pared gains after the New York Federal Reserve's "Empire State" general business conditions index for August rose by much more than expected, with the gauge of the manufacturing sector showing growth for the first time since April 2008.

"The Fed survey was stronger than expected, which corroborates the idea that manufacturing is rebounding. It's the highest reading since November 2007, which underscores the rebound, and also the depths it had fallen," said Dan Greenhaus, analyst with Miller Tabak & Co. in New York.

"The big story remains that after the near-term bounce, how will it fare after the impact of the stimulus goes away?"

Treasuries shrugged off a survey showing that U.S. homebuilder sentiment was the highest in a year, which added to recent evidence that housing activity is embarking on a feeble recovery.

The market showed little reaction to data showing net overall capital outflows from the U.S. fell to $31.2 billion in June from May's $65.7 billion outflow. China cut its U.S. Treasury holdings while Japan increased its holdings.

Two-year notes were trading 3/32 higher in price for a yield of 1.02%, down from 1.07% late Friday.

The 30-year bond was 1-20/32 higher in price for a yield of 4.33% from 4.43% late on Friday.

The Federal Reserve bought $7.016 billion of Treasurys, making most of its purchases in debt maturing in five years, offering some further support for government debt prices.

A hiatus in the torrent of government issuance of notes and bonds, which had totaled $75 billion last week, also helped Treasurys extend recent gains Monday.

According to Bank of America Merrill Lynch Fixed Income Indexes, last week was the best week for Treasurys since the week before Christmas, with a total return of 1.47% on the Treasury Master Index.

Among benchmark issues, 10-year notes delivered a total return of 2.52% on the week, again the best since late December. Two-year notes returned 0.51% on the week, their best showing since last fall. To top of page

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