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Treasurys higher on bond insurance woes

February 01, 2008 | "Associated Press"

New worries about the bond insurance sector, weak labor and consumer data send bonds modestly higher.

Long-term Treasury prices rose modestly Thursday on a combination of new worries about the bond insurance sector and data reports underscoring the depth of the economic slowdown.

Treasurys are backed by the federal government and generally come into favor when there are concerns about risks to the financial system and the broader economy.

On Thursday, there were plenty of worrisome new developments to keep the spotlight on Treasurys and distract the market from the fact that on Wednesday the Federal Reserve gave it a sizable 0.50 percentage point reduction in key interest rates.

The latest clutch of worries included a $2.3 billion loss for bond insurer MBIA Inc. for its exposure to subprime mortgage assets. There also is market speculation that ratings agencies are close to issuing new downgrades for some insurers that would block them from insuring new municipal and corporate issuance and imperil those markets.

And Standard & Poor's on Wednesday forecast a widening array of financial institutions would ultimately face mortgage-securities losses totaling more than $265 billion. The ratings agency also downgraded or warned it might downgrade more than 8,000 mortgage investments.

"There is just a lot of 'headline risk,' a lot of bad news in the market," said Tom di Galoma, head of Treasurys trading at Jefferies & Co.

The benchmark 10-year Treasury note rose 1/32 to 105 with a yield of 3.63%, unchanged from late trade Wednesday, according to BGCantor Market Data.

The 30-year long bond advanced 15/32 to 110 22/32 with a yield of 4.35%, down from 4.36% the day before.

Fed delivers another rate cut

However, there was some selling of shorter-term notes. The 2-year note fell 2/32 to 99 29/32 with a 2.17% yield, up from 2.15% in late trade Wednesday.
The move into low-risk assets also was spurred by data reports detailing the economy's struggles. The Commerce Department's personal consumption and income report for December underscored the fact that the economy continued to weaken as 2007 ended. Consumer spending edged up just 0.2% last month, the year's peak shopping season; that was down sharply from a 1% gain in November.
The report's price index for personal consumption expenditures, a gauge of inflation carefully monitored by the Fed, rose 0.2% in December from November levels. The department said personal incomes rose 0.5% last month.

Separately, the Labor Department reported a startling jump of 69,000 new jobless claims in the latest week, pushing the total to 375,000. That is the highest level since early October and the largest increase since September 2005. Thomson/IFR had forecast a much smaller gain of just 14,000 new claims to 315,000.
The claims report follows a reference in the Fed's new policy statement Wednesday to worsening labor market conditions that has investors worried.
Another report showed manufacturing activity in the Chicago area slowing this month.

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