Treasuries Rise to the Highest Since 2005 in Flight to Quality

By Deborah Finestone and Sandra Hernandez


Nov. 15 (Bloomberg) -- Treasuries rose to the highest level since 2005 as concern over subprime mortgage losses led investors to sell stocks and seek the safety of short-term government debt.

Yields on two-year notes fell more than 10-year securities as traders increased bets that the Federal Reserve will cut interest rates next month to shore up credit markets. Barclays Plc wrote down $2.7 billion of securities, and Wells Fargo & Co. said it's ``not immune'' to what it said is the worst housing market since the Great Depression.

``Treasuries are the safe haven,'' said Colin Lundgren, head of institutional fixed income in Minneapolis at RiverSource Investments, which oversees $100 billion of bonds. ``It was last month's writedown, it was last week's writedown, it was yesterday's writedown, it was today's writedown.''

The yield on the two-year note fell almost 19 basis points, or 0.19 percentage point, to 3.32 percent at 5 p.m. in New York. It's the least since February 2005. Five-year notes yields dropped 15 basis points to 3.67 percent, the lowest since July 2005. Yields on 10-year notes decreased 11 basis points to 4.14 percent, the lowest since September 2005. The benchmark note's yield last fell below 4 percent on Sept. 2, 2005.

Bonds got a boost from speculation that a trader mistakenly sold options, prompting dealers to expect that the trader would be forced to repurchase the contract, said Tom di Galoma, head of government bond trading in New York at Jefferies & Co., a brokerage for institutional investors.

Benchmark 10-year notes yielded 83 basis points more than those of two-year notes, the biggest difference on the Treasury yield curve since March 2005.

`Steepening Trade'

``We have an almost perfect storm for the steepening trade,'' said Christopher Sullivan, who oversees $1.3 billion as chief investment officer in New York at the United Nations Federal Credit Union. With weak stocks and credit writedowns, ``the bond market sees a likely Fed rate cut in December.''

In a sign of increased credit risk, the gap between three- month bill yields and the London Interbank Offered Rate, or Libor, for dollars widened for a second day to 160 basis points, 3 basis points from the highest since September. Yields on the bills fell 9 basis points to 3.30 percent, the biggest drop in almost a week. Three-month Libor for dollars increased 3 basis points to 4.91 percent.

Barclays, the U.K.'s third-biggest bank, said that it wrote down about 1.3 billion pounds ($2.7 billion) of credit-related securities tied to the U.S. subprime-mortgage market collapse. Wells Fargo, the second-largest U.S. mortgage lender, said the bank's home-equity losses are likely to increase in the fourth quarter and remain ``elevated'' through 2008.

Bank Writedowns

The world's largest securities firms and banks have announced more than $45 billion of losses in the third and fourth quarters from writedowns of collateralized debt obligations and other instruments backed by mortgages to people with poor credit.

The Standard & Poor's 500 Index declined 1.3 percent, while the Dow Jones Industrial Average lost 0.9 percent. Benchmark indexes also retreated in Europe and Asia.

Treasury yields have mostly moved in the same direction as U.S. stocks in the past six weeks. The two-year note yield and the S&P 500 had a correlation of 0.93 since Oct. 1. A figure of 1 would indicate they have moved in lockstep.

The amount of U.S. asset-backed commercial paper was little changed in the latest week. Debt maturing in 270 days or less and backed by mortgages, credit-card loans and other assets fell $574 million to a seasonally adjusted $853.3 billion for the week ended yesterday, the Fed said. The decline was the smallest since the market began shrinking from its peak of $1.2 trillion on Aug. 8.

Fed Rate Outlook

Interest-rate futures on the Chicago Board of Trade suggested a 94 percent chance that the U.S. central bank will lower its target rate for overnight lending an additional quarter-percentage point when it meets on Dec. 11, compared with 72 percent odds yesterday. Policy makers have lowered borrowing costs 75 basis points to 4.5 percent since September.

Treasuries extended gains after a Labor Department report showed consumer prices in the U.S. rose in October at the same pace as the prior month, led by increases in fuel costs that threaten to boost inflation and slow growth.

Ten-year U.S. notes yielded 2.37 percentage points more than similar-maturity Treasury Inflation Protected Securities. The difference, representing the rate of price increases that investors expect over the next decade, has widened as oil climbed to a record.

``The market is a little sensitive to inflation data,'' said Alan Wilde, deputy head of fixed-income and currencies in London at Baring Investment Services. ``The economy's still moving on at a reasonable pace.''

Bond Reinvestments

Treasuries were also buoyed as investors prepared to reinvest about $57.4 billion of coupon payments, maturing debt and a called Treasury bond today, according to Stone & McCarthy Research Associates in Princeton, New Jersey. It's the largest cash infusion of its kind since August, said John Canavan, a fixed-income analyst at the firm.

The yield on the two-year note will be 3.87 percent by year-end, according to a Bloomberg survey of 65 economists, with the most recent forecasts given the heaviest weightings.