Treasuries Rally as Stocks Drop; Ten-Year Yield Falls Below 4%

By Daniel Kruger and Lydia Thew


Nov. 21 (Bloomberg) -- Treasuries rallied, sending 10-year note yields below 4 percent for the first time since 2005, as a decline in global stocks spurred demand for the safety of government debt.

``Treasury yields are based on the fear gauge of the day, and fear is at high levels,'' said Andrew Harding, who helps manage $16 billion as chief investment officer for fixed income in Cleveland at Allegiant Asset Management.

Bonds rose as U.S. equities fell and oil increased to within 71 cents of $100 a barrel before dropping. The spread, or difference in yield, between two- and 10-year notes widened to the most since early 2005 on speculation the Federal Reserve may have to lower interest rates even as inflation accelerates.

The yield on the 10-year note fell 8 basis points, or 0.08 percentage point, to 4.01 percent at 4:53 p.m. in New York, according to bond broker Cantor Fitzgerald. It touched 3.98 percent, the lowest since July 2005. The price of the 4 1/4 percent security due in November 2017 rose 23/32, or $7.19 per $1,000 face amount, to 101 31/32.

Yields on two-year notes decreased 18 basis points to 2.99 percent after touching 2.96 percent, the lowest since December 2004. They yielded 102 basis points less than 10-year notes, the most since January 2005. Yields move inversely to bond prices.

The steepening of the so-called yield curve suggests investors are buying shorter-maturity debt in anticipation of interest-rate reductions by the Fed.

Three-month Treasury bill yields have dropped 33 basis points this week to 3.08 percent, while the four-week bill yield has declined 48 basis points to 3.35 percent.

Fiscal Year-End

Traders speculated that some brokerages bought Treasuries to put the safest assets on their balance sheets before the end of their fiscal year next week.

``In the long run this isn't sustainable, but you have quarter-end and year-end for broker dealers coming up,'' said Matthew Moore, an interest-rate strategist in New York at Banc of America Securities LLC, one of the 21 primary dealers required to bid at Treasury auctions. Treasuries could continue to rally ``if these credit fears are sustained.''

Abbey National Plc, the U.K. mortgage lender owned by Banco Santander SA in Madrid, became the third company to cancel plans to sell covered bonds within a week. Covered bonds are AAA rated securities popular in Europe that use assets on an issuer's balance sheet as collateral, providing investors with a stronger likelihood for recovery and the borrower with a top debt rating.

Chrysler LLC's bankers failed to sell $4 billion of loans that backed the purchase of the automaker by Cerberus Capital Management LP, according to investors briefed on the decision.

`Positions to Hedge'

``This market is about the professionals who have got funding needs, positions to hedge, margin calls,'' said David Ader, head of U.S. government bond strategy in Greenwich, Connecticut, at RBS Greenwich Capital, also a primary dealer.

U.S., European and Asian stocks sank, with the Standard & Poor's 500 Index dropping 1.6 percent. Gold appreciated as oil's earlier surge prompted investors to buy the precious metal as a hedge against inflation.

Two-year note yields have moved in the same direction as the S&P 500 index 81 percent of the time since Nov. 1, compared with 57 percent since the start of the year.

The Fed said in the minutes of its Oct. 31 meeting released yesterday that there's ``uncertainty'' about the outlook for U.S. economic growth, fueling speculation it will cut borrowing costs again when policy makers meet next month. The minutes pushed the U.S. currency to a record low of $1.4856 per euro.

Futures contracts on the Chicago Board of Trade showed an 86 percent chance that the Fed will lower its target rate a quarter-percentage point to 4.25 percent on Dec. 11 and 75 percent odds of a cut to 4 percent in late January. The central bank cut its benchmark rate to 4.5 percent in October.

Libor Increases

The amount banks charge each other to borrow in dollars for three months rose for a sixth day. The London interbank offered rate, or Libor, climbed 2 basis points today to 5.02 percent. That's 52 basis points more than the Fed's benchmark rate, the biggest difference since Sept. 18, when U.S. policy makers cut the benchmark rate a half-percentage point.

Three-month Libor for dollars has increased to 1.93 percentage points more than Treasury bill yields of the same maturity. The ``TED'' spread, as it's known, is the widest since Aug. 20 and up from 0.94 percentage point on Oct. 15. A wider gap is a sign that investors are concerned that credit-market losses will increase.

``The liquidity problems are almost insurmountable,'' said Sean Murphy, a Treasury trader and strategist in New York at RBC Capital Markets, the investment-banking arm of Canada's biggest bank. ``You're getting all sorts of unwinds.''

The Securities Industry and Financial Markets Association recommended trading of Treasuries close at 2 p.m. New York time and stay shut tomorrow for Thanksgiving. It also recommended trading close at 2 p.m. New York time on Nov. 23.