Subprime Contagion May Claim 10-Year Treasuries Next

The U.S. housing slowdown that propelled 10-year Treasuries to their biggest gains since 2002 may soon make the same securities laggards in the government bond market.

The notes returned 9.6 percent since mid-June as investors sought a haven from credit market losses caused by subprime mortgages.

Sales of bonds backed by housing loans have dropped 20 percent this year as home purchases declined.

Fund managers may ``no longer buy the 10-year Treasury'' to protect their holdings. With housing prices actually decreasing coupled with tighter underwriting standards, you've definitely decreased the number of people who could refinance.

A drop in adjustable-rate mortgages is also adding to duration. The percentage of applications for loans with rates that change over time is the lowest since July 2003.

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