Treasury 10-Year Yield Is Lowest Since March 2004 on Subprime

By Deborah Finestone and Sandra Hernandez


Nov. 26 (Bloomberg) -- Treasuries rose, pushing 10-year note yields to the lowest since March 2004, as concern that subprime mortgage losses will continue to spread led investors to sell stocks for the relative safety of government debt.

The yield on the 30-year bond fell the most in three years after Goldman Sachs Group Inc. analysts said HSBC Holdings Plc may have to set aside a further $12 billion for bad debts. The Federal Reserve sought to ease concern that banks will be short of cash next month by planning its first long-term injection of year-end funds in two years.

``With equity prices weaker, more people are allocating assets into the fixed-income arena, even with yields as low as they are,'' said Gary Pollack, who helps oversee $12 billion as head of fixed-income trading in New York at Deutsche Bank AG's private wealth management unit.

The 10-year note's yield decreased 16 basis points, or 0.16 percentage point, to 3.84 percent at 4:45 p.m. in New York, according to bond broker Cantor Fitzgerald LP. It touched 3.79 percent, the lowest since March 2004. The price of the 4 1/4 percent coupon due in November 2017 rose 1 11/32, or $13.44 per $1,000 face amount, to 103 13/32.

The yield on the 30-year bond fell 14 basis points to 4.29 percent after touching 4.23 percent, the lowest since July 2005. It was the biggest drop since June 15, 2004, when then Fed chairman Alan Greenspan said inflation wasn't ``a serious concern.''

``The longer end is one of the few places you can still get'' more than 4 percent in yields, said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors.

HSBC Bailout

HSBC, Europe's largest bank, said it will bail out two structured investment vehicles, taking on $45 billion of assets to avoid a fire sale of bond holdings. The rescue is the biggest for SIVs, companies that borrow short term to invest in higher- yielding securities.

Citigroup Inc., which has announced at least $8 billion of fourth-quarter writedowns on mortgage investments, is reviewing ways to ``be more efficient and cost effective'' as it seeks a new chief executive officer, said Christina Pretto, a spokeswoman for the bank.

The Standard & Poor's 500 Index dropped 2.3 percent, and the Dow Jones Industrial Average fell 1.8 percent.

Banks and other financial firms have reported more than $50 billion of mortgage-related losses and writedowns, increasing the appeal of fixed-income assets. Treasuries of all maturities have returned 2.76 percent through Nov. 23, according to Merrill Lynch & Co. bond indexes. That's the best performance since gaining 2.98 percent in September 2003.

Two-Year Notes

Yields on two-year notes fell 19 basis points to 2.88 percent and earlier touched 2.87 percent, the lowest since December 2004. They yielded 96 basis points less than 10-year notes, 5 basis points from the widest spread since January 2005, which was reached last week. The narrowing gap suggests reduced demand for shorter-term securities.

People are investing in two-year debt ``for defensive purposes and not for investment-return purposes because the yield is just too low there in normal times,'' said Andrew Harding, who helps manage $16 billion as chief investment officer for fixed income in Cleveland at Allegiant Asset Management.

Fed Rate Outlook

Futures on the Chicago Board of Trade show traders began betting that the Fed will lower its target rate for overnight lending between banks by a half-percentage point on Dec. 11. Traders see an 82 percent chance rates will be cut to 4.25 percent at the meeting, and 18 percent odds of a cut to 4 percent. The Fed has reduced the rate by three quarters of a percentage point this year to 4.5 percent.

Yields on two-year notes are at ``extreme levels, indicating the bond market's perspective that the Fed needs to go to an easing cycle,'' said T.J. Marta, a fixed-income strategist in New York at RBC Capital Markets, the investment- banking arm of Canada's biggest lender. ``It's no longer asking politely. It's back to demanding.''

Losses have made banks reluctant to lend to each other, keeping the average overnight fed funds rate above the central bank's target almost every day since Nov. 9.

The New York Fed said today it will arrange $8 billion of long-term repurchase agreements, or repos, to extend financing into the new year ``in response to heightened pressures in money markets for funding through the year-end.''

First Since 2005

The repos, the first such operation since 2005, will be arranged Nov. 28 and mature Jan. 10, the central bank said in a statement. The Fed said it also plans to ``provide sufficient reserves to resist upward pressures'' on the funds rate around year-end.

The cost of borrowing dollars for three months rose as banks hoarded cash to cover their commitments through the end of the year. The London interbank offered rate, or Libor, for dollars rose 1 basis point to 5.05 percent, for a four-week high and the ninth straight day of gains, the British Bankers' Association said today.

That pushed the ``TED'' spread, or the difference between three-month Treasury bill yields and Libor, to 1.95 percentage points, the widest since Aug. 20, when it reached 2.4 percentage points. The yield on the three-month bill fell 11 basis points to 3.10 percent.

The Treasury Department said today it will sell $20 billion in two-year notes on Nov. 28 and $13 billion in five-year debt the following day, in line with expectations from Wrightson ICAP in Jersey City, New Jersey.

Trading in Treasuries through ICAP Plc, the world's largest broker of trades between banks, has risen 34 percent since the Fed cut the discount rate by a half-percentage point on Aug. 17 Trading volume from that day through today has averaged $322.6 billion, compared with $242.1 billion for the same period in 2006.