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Treasurys recover on 'anemic' economy

February 11, 2008 | "Associated Press"

Bond prices rebounded after San Francisco Fed president said the first half of the year will be 'anemic' due to housing and financial market turmoil.

Treasury prices rallied Friday after a Federal Reserve official said more rate cuts are possible because the economy faces a sluggish first half of the year.

San Francisco Federal Reserve President Janet Yellen said late Thursday that the first six months of 2007 will be "anemic," noting the severe contraction of the housing market and related financial market turmoil. Yellen said the Fed must be prepared to act to support the economy, although she also said the country will likely avoid a recession.

Concerns about economic weakness often create demand for safe assets like government-backed bonds.

On Thursday there was a wave of unusually nervous selling after a disappointing auction of $9 billion in new 30-year notes caused the 30-year long bond to suffer its weakest decline in about four years. The bond sale attracted few bids from foreign central banks and that worried investors as there are concerns that a weaker dollar has diminished global demand for U.S. debt.

The benchmark 10-year Treasury note rose 24/32 to 98 19/32 Friday with a yield of 3.67 percent, down from 3.76 percent late Thursday according to to BGCantor Market Data.

The 30-year bond gained 29/32 to 98 31/32 with a yield of 4.44 percent, down from 4.53 percent late Thursday.

The 2-year note advanced 6/32 to 100 11/32 with a 1.95 percent yield, down from 2.06 percent.

Fed official: Economy weak, but no recession

Investors are hopeful the Fed will lower the overnight fed funds rate on or before its next scheduled monetary policy meeting March 18. The fed funds rate already has been reduced by 1.25 percentage points this year and now stands at 3 percent.
The 2-year note sometimes trades as a proxy for the fed funds rate and the fact that it is under 2 percent is a signal that the market expects a reduction of about 0.50 percentage point in coming weeks.

The view that the economy is slowing was reinforced by figures from the Commerce Department that suggested wholesalers have too much inventory at a time when retail sales are stagnant. In December inventories grew by 1.1 percent, the largest gain in a year and a half, while wholesaler sales dropped by 0.7 percent.

Demand for Treasurys also was fueled by concerns about German banks' exposure to bad subprime assets, according to Action Economics. There are reports that several large German banks will need capital infusions to complete some upcoming mergers.

In addition, there is speculation that European firms have been selling some of the bad subprime debt held in the complex asset pools known as collateralized debt obligations, according to Action Economics. The liquidation of low-quality assets often intensifies demand for safe assets.

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