By Sandra Hernandez and Deborah Finestone
March 12 (Bloomberg) -- Treasuries rose, wiping out more than half of yesterday's decline in the two-year note, on speculation the Federal Reserve's plan to revive bank lending and stem losses in credit markets may fail.
Investors sought the relative safety of U.S. government securities on concern the central bank's plan to swap Treasuries for agency and private mortgage bonds won't lessen banks' demands for more collateral on loans secured by debt. Traders increased bets policy makers will cut the benchmark lending rate by three-quarters of a percentage point next week.
``It's a retracement of yesterday's euphoria,'' said Lawrence Dyer, an interest-rate strategist in New York at HSBC Securities USA Inc., one of the 20 primary dealers required to bid at Treasury auctions. ``When you look into the financial plumbing of the Fed plan, it's helpful, but when you look at what your real problem is, it's not helpful enough.''
The two-year note's yield dropped 13 basis points, or 0.13 percentage point, to 1.61 percent at 4:21 p.m. in New York, according to bond broker Cantor Fitzgerald LP. The price of the 2 percent security due in February 2010 rose 1/4, or $2.50 per $1,000 face amount, to 100 3/4.
Yesterday's decline pushed the yield up 26 basis points, the most since March 1996, as the Fed pledged to lend, in return for agency and private mortgage debt, $200 billion of Treasuries to the firms that trade directly with the central bank.
``This is like a Band-Aid and hasn't necessarily solved the problem,'' said Don Alexander, director of fixed income in New York at Citigroup Global Wealth Management, which oversees about $1.3 trillion in assets. ``When they had the chance to stop the financial crisis, they didn't do it. Now it has spilled over into the real economy.''
The benchmark 10-year note's yield fell 15 basis points to 3.45 percent, erasing yesterday's increase. Five-year rates decreased 17 basis points to 2.46 percent, after rising 26 basis points yesterday.
Hedge funds with more than $5.4 billion have been forced to liquidate or sell holdings since Feb. 15 as banks demanded more collateral for bond-secured loans.
New York-based Drake Management LLC told investors today that it would either liquidate its $3 billion global opportunities fund, continue to restrict redemptions or allow clients to shift assets to a new fund.
Separately, Amsterdam-based GO Capital Asset Management BV prevented customers from taking money out of its $880 million global opportunities fund, saying in a letter yesterday that ``current market circumstances don't allow the fund to sell investments at a reasonable price.''
Fed Rate Outlook
Interest-rate futures on the Chicago Board of Trade indicate a 74 percent chance the Fed will cut its 3 percent target lending rate by three-quarters of a percentage point at its meeting on March 18, compared with 62 percent odds yesterday. The rest of the bets are for a half-point cut.
Treasuries of all maturities have had their best start to a year since 2004, returning 3.27 percent through yesterday, as investors sought refuge from $190 billion of mortgage-related losses at banks and securities firms since the start of 2007.
Government debt also gained as traders speculated that retail sales grew less than forecast in February, said Richard Bryant, who trades 30-year bonds in New York at primary dealer Citigroup Global Markets Inc.
Retail sales rose 0.2 percent last month, according to the median forecast of 79 economists surveyed by Bloomberg News, after a 0.3 percent gain in January that was bigger than forecast. The report from the Commerce Department is due tomorrow. Consumer spending accounts for about 70 percent of the U.S. economy.
The outlook for the global economy deteriorated for a fourth month in March on declining faith in Asia's ability to dodge the U.S. slump, a survey of Bloomberg users on five continents showed. The Bloomberg Professional Global Confidence Index fell to 13.1 from 14.3 in February. A reading below 50 indicates negative sentiment.
``As the year progresses, the economy will still be sluggish,'' said William Tedford, who helps manage $700 million in fixed income as executive vice president at Stephens Capital Management in Little Rock, Arkansas. ``Inflationary fears will moderate later, and that will be an opportunity to make some money from declining interest rates.''
The pace of consumer price increases will slow to 2.5 percent by the fourth quarter, according to the median estimate of 84 firms in a Bloomberg survey. Consumer prices including food and energy rose 4.3 percent in January, the Labor Department said Feb. 20. Longer-maturity Treasuries are more sensitive than shorter-term notes to inflation expectations.
Decline in Stocks
Treasuries extended gains as stocks declined. The Standard & Poor's 500 Index fell 0.9 percent, and the Dow Jones Industrial Average lost about 0.4 percent.
The Fed yesterday also increased its currency swap line with the European Central Bank to $30 billion, from $20 billion, and one with the Swiss National Bank to $6 billion, from $4 billion.
The cost of borrowing euros for three months rose for a seventh day. The euro interbank offered rate, or Euribor, for the loans increased 1 basis point to 4.61 percent today, the highest since Jan. 7, the European Banking Federation said. The comparable dollar rate fell 2 basis points to 2.85 percent.