The Wall Street Journal-20080112-Treasurys Rally on Recession Talk
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Treasurys Rally on Recession Talk
Treasury bonds rallied across the board, as stocks tumbled following more gloomy news from the financial sector, fueling worries about a recession.
Treasury bills led the advance Friday as investors sought refuge in the shortest-date government debt. The bond equivalent yield on the six-month T-bill dropped to 3.065% from 3.210% Thursday.
The yield on the two-year note, the most sensitive to changes in monetary policy, fell to 2.591%, a level last seen in 2004, as the markets priced in deeper interest-rate cuts by the Federal Reserve this year. The note's price gained 7/32 point to 101 8/32.
As a result, the benchmark yield curve, or the yield gap between the two-year and 10-year sectors, steepened to its widest level in more than three years, at 1.217 percentage points.
Investors also unwound hedges from Goldman Sachs Group's $3 billion bond sales by buying back Treasury notes. Short-covering in the longer-dated sector from Thursday's decline added to the rally, traders said, with the 10-year note advancing 21/32 point to 103 19/32 to yield 3.808%.
"There is safe-haven flow into Treasurys," said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage firm for institutional investors. "People are getting nervous about the health of the financial sector. You have the fear of a recession and the fear is growing."
Investor concerns over further large write-downs at banks were fueled by a report that Merrill Lynch's losses from mortgage investments gone bad could be double the original estimates. Comments by UBS, warning the crisis in financial markets is far from over, further hurt sentiment.
Despite all the concerns over the financial sector, interbank lending rates continued to ease as central banks keep open the liquidity tap.
MBIA Sells Surplus Notes
Bond insurer MBIA Inc. sold $1 billion of 25-year surplus notes, priced at par, with a fixed 14% coupon, according to people familiar with the deal. "That's high-yield levels," said an investor familiar with the deal.
The notes are callable after five years. If not called, the coupon will switch to a floating rate of 11.26 percentage points over the London interbank offered rate.
Success in selling the notes is a vital part of MBIA's capital- raising strategy to defend its top, triple-A rating.
-- Romy Varghese
