The US Treasury debt market rallied on Friday, led by the 30-year bond, as data showing a record drop in US retail sales fanned fears of a deep recession and revived safe-haven bids for bonds.
Fears about the economy were compounded by renewed worries about the credit market, where dollar interbank lending rates rose for a second day after Treasury Secretary Henry Paulson suggested changes to the government's $700 billion financial bailout, raising doubts about its effectiveness.
With the stock market failing to back up Thursday's surge, anxious investors piled back into government bonds following Thursday's Treasuries sell-off tied to a stock rally and a poor 30-year bond auction, traders and analysts said. "Treasuries are still the safest place to be," said Richard Lee, managing director of fixed income at Wall Street Access in New York. "You are having a reversal of yesterday's sell-off. Most of that selling was exaggerated."
The price on benchmark 10-year notes were up 1-4/32 point at 100-8/32, near their session high. Their yield, which moves inversely to the price, was 3.72 percent, down from 3.85 percent late Thursday. Two-year notes were up 2/32 in price with yields dipping to 1.19 percent, not far above their five-year low, from 1.24 percent late Thursday.
Major US stock indexes were down as much as 3.8 percent in midday trading on Friday in the wake of a government report that showed US retail sales falling 2.8 percent last month, the biggest single-month drop ever. "There is no doubt as to the weakness in consumer spending, which will probably weigh on the economy for the next six- to nine months," said Kevin Flanagan, fixed income strategist for global wealth management at Morgan Stanley in Purchase, New York.
While falling gasoline prices have offered relief, consumers are still being squeezed by tight lending standards, a turbulent stock market and rising unemployment, analysts said. Other data on Friday, however, showed a slight bounce in consumer confidence. The Reuters/University of Michigan index on consumer sentiment rose to 57.9 in early November from 57.6 in October. Analysts had forecast the index would decline to 56.0.
Adding to worries about a weakening consumer sector were signs that credit markets may be deteriorating again after a month of steady improvement due to efforts from central banks. The three-month interbank lending rate on unsecured dollar funds in London, a global rate benchmark, rose for a second day. The three-month dollar Libor climbed to 2.23625 percent from 2.14875 percent on Thursday, according to the British Bankers' Association.
If credit conditions do worsen once more, global central bankers are ready to take more steps, said Federal Reserve Chairman Ben Bernanke. Among other Treasury maturities, five-year notes were up 18/32 to yield 2.31 percent, down from 2.42 percent late Thursday. The 30-year bond was up more than 2 points in price, rebounding from Thursday's selloff in reaction to poor demand to $10 billion in new supply. Its yield last traded at 4.23 percent, down from 4.35 percent late Thursday.
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