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Treasurys plunge

February 05, 2008 | "Associated Press"

Treasurys fall on signs of confidence in economic stimulus package; investors trade bonds for stocks.

Long-term Treasury prices closed lower Monday, as investors pulled away from safe haven investments and reassessed the economic outlook.

A number of rallies linked to economic worries earlier in the year sent yields to multi-year lows, as prices and yields move in opposite directions. But sentiment has improved somewhat after the Federal Reserve's recent rate cuts; investors also are cautiously hopeful about a government effort to stimulate the economy and a consortium of banks that is trying to locate funding for ailing bond insurers.
These developments Monday caused investors to unload long-term Treasurys. Government bonds tend to perform best in time of economic challenge and to falter when a better outlook entices investors into riskier asset.

There was limited demand for 2-year notes, which pushed its yield lower. The 2-year yield mirrors market expectations for monetary policy, so sending it lower is a way that traders signal that they expect more rate cuts from the Fed.

The benchmark 10-year Treasury note fell 7/32 to 104 20/32 with a yield of 3.645, up from 3.63% late Friday, according to BGCantor Market Data. Prices and yields move in opposite directions.

The 30-year long bond fell 27/32 to 110 10/32 with a yield of 4.37%, up from 4.28% late Friday.

The 2-year note rose 3/32 to 100 3/32 with a 2.06% yield, down from 2.35% late Friday.

The yield on the 3-month note rose to 2.24% from 2.15% late Friday as the discount rate advanced to 2.19% from 2.09%.

The sense that the economy was improving was reinforced by news from the Commerce Department that businesses stepped up their demand in December for capital equipment to expand production. Core capital equipment orders rose 4.5% in December, revised up from 4.4% estimated a week ago, the government said.
Throughout most of January, investors were anxious about a faltering economy and the continuing fallout from the bond insurance and subprime mortgage crises. These worries fueled an unusually strong Treasury market rally, as investors usually opt for government-guaranteed assets when the economy appears weak.
Although there remain many risks to the economy, sentiment has improved in the wake of recent rate cuts, economic stimulus efforts on the part of the Federal government and recent sizable interest reductions by the Federal Reserve.
"Nobody is going crazy, mind you, but you are getting the sense that investors are beginning to believe that between the Federal Reserve and the fiscal stimulus package, the U.S. economy can be saved," said Kevin Giddis, managing director of fixed income at Morgan Keegan.

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