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Bank woes spark Treasury rally

January 28, 2008 | "Associated Press"

Traders seek safety amidst news of Goldman Sachs layoffs and rumors of more hedge fund troubles.

Long-term Treasury prices threw off early weakness and rallied Friday after worries about the health of financial services companies kindled demand for safe assets.

News that investment bank Goldman Sachs Group (GS, Fortune 500) will lay off about 5 percent of its weak-performing employees helped feed some of the advance, although the investment bank said such cuts are standard practice.
There also were rumors that Dutch banking giants ING (ING) and Fortis may have to issue new profit warnings. Those rumors may have had a disproportionate impact because there is great nervousness about European banks this week after a rogue Societe Generale trader brought about $7.1 billion in losses for his institution through illegal trades. Fortis' stock fell and the bank issued a statement that it knew of no reason for the declines.

Another rumor that caught investors' attention concerned the possibility of new hedge fund trouble, according to Tom di Galoma, head of Treasurys trading at Jefferies & Co. That rumor was never verified.

However, there was a large hedge fund liquidation of a market bet on the difference between the yields of the 2-year and 10-year notes, he said. The unwinding of such a trade is not necessarily an indication of distress.

Stimulus plan also sparks housing market

Worries about weakness at financial institutions tend to spark demand for Treasurys, which carry government backing and are largely shielded from the risks of some other asset classes.

The benchmark 10-year Treasury note gained 23/32 to 105 1/32 with a yield of 3.63 percent, down from 3.71 percent in late trade Thursday. Prices and yields move in opposite directions.

The 30-year long bond advanced 26/32 to 111 2/32 with a yield of 4.32 percent, down from 4.37 percent late Thursday.

However, there was slight demand for short-term notes. The 2-year note rose 1/32 to 101 28/32 with a yield of 2.26 percent, down from 2.32 percent late Thursday.

During most of January the stock market was slammed by storms of selling as investors reacted negatively to dismal earnings from major banks and shakiness in the credit markets and overall economy. The aversion to the risks of financial and other stocks created heavy demand for Treasurys, which carry government backing.

Yet investor sentiment may have improved somewhat this week, following a large Federal Reserve rate reduction and an economic stimulus plan agreement between the Bush administration and congressional leaders. Investors since Wednesday in general have been more interested in the bargains in the stock market.

The Fed will hold a monetary policy meeting on Tuesday and Wednesday. Many investors expect the Fed to follow up on this week's sizable 0.75 percentage point rate reduction with a 0.50 percentage point cut that would drive the overnight Fed funds rate charged to commercial banks down to 3 percent.

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