Treasurys were back in favor Tuesday after a spike in Spain's borrowing costs sent stocks plunging in the U.S. and Europe.
As investors flocked to Treasury debt, borrowing costs for the U.S. government dropped. The yield on the benchmark 10-year Treasury note fell to 1.98 percent Tuesday from 2.04 percent late Monday. Its price rose 40.6 cents for every $100 invested.
New worries about Spain's finances sent that country's bond yields higher. The yield on the country's 10-year bond jumped to 5.93 percent. Just one month ago it was 4.9 percent.
The worries stem from the Spanish government's big austerity program, which comes at a time when the country's economy is heading for another recession and unemployment stands at around 23 percent.
The increase in Spain's borrowing costs impairs the country's ability to borrow money and stay afloat. That's getting investors worried that Spain may need to seek relief from its lenders, as Greece and Portugal have already done.
A Spanish bailout would be far more difficult. Its economy is twice the size of the three countries that have already needed a financial rescue. If the Spanish debt situation deteriorates, some analysts say Italy could be next, plunging Europe's debt crisis into a dangerous new phase.
"It's a perfect storm," said William O'Donnell, head U.S. government bond strategist at RBS Securities Inc. "There's no firewall high enough when Spain comes knocking for help. It will dwarf any of the backstop provisions set up to date."
The rush into U.S. government bonds gave the Treasury a great platform to launch the first of three auctions, in which it plans to raise $66 billion this week.
On Tuesday the Treasury sold $32 billion of three-year notes at a yield of 0.427 percent. Demand for the notes outstripped supply by 3.36 times, slightly lower than the 3.5 times in the previous four auctions. However, there was a lot of demand from indirect bidders, which is made up retail investors and also foreign central banks, who bought 40 percent of the notes. That was the highest since August.
In other trading, the yield on the 30-year bond fell to 3.13 percent from 3.18 percent Monday. Its price jumped $1.34 per $100 invested. The yield on the two-year note fell to 0.29 percent from 0.31 percent, while the yield on the three-month T-bill was flat at 0.08 percent.