US government bond prices surged on Thursday, driving benchmark yields to two-month lows, as investors bailed out of stocks and other riskier assets amid deepening worries of a global credit crunch.
Surprisingly weak economic data also added to a flight-to-safety bid for Treasuries, handing the benchmark 10-year Treasury notes their best daily performance since February 27. At one point, two-year notes were on track to post the biggest one-day drop in yields since 2004.
"You have a classic flight-to-quality rally. Markets outside the Treasury market are finally appreciating risk," said Dean Junkans, chief investment officer at Wells Fargo Private Bank in Minneapolis. Stocks and corporate credit markets sank on deepening concerns as firms encountered difficulty in financing buyout deals.
"You have got a big unwinding of risk taking place, spreads are widening in the high yield market. The concerns about housing are filtering through in subprime, hedge fund exposure and investment bank exposure," said Junkans. "That's playing itself out in the stock market today and the Treasury market is the beneficiary."
Benchmark 10-year Treasury notes briefly traded up a full point in price, before retreating to be 28/32 higher for a yield of 4.79 percent, compared with 4.90 percent late on Wednesday.
Yields, which move inversely to prices, touched their lowest level since May 18 during the session. Treasury market volume was very heavy on Thursday at about double the 20-day moving average, according to ICAP.
In addition to the credit fears, Treasuries were also buoyed by a sharp fall in new-home sales and an unexpected slide in business investment, which raised the possibility that the economy might not be as strong as initially anticipated.
Two-year notes rose 10/32 in price, pushing yields down to 4.57 percent from 4.74 percent late Wednesday, while the 30-year bond rallied a full point for a yield of 4.96 percent, up from 5.03 percent. "A lot of people are moving out of stocks, out of riskier fixed income into short-term Treasuries. If the stock market recovers, you will see the paid auction of $13 billion worth of five-year notes, with attention focused on the stock market plunge and widening spreads on the credit market.
Credit worries pushed swap spreads to their widest level in nearly 5-1/2 years, with 10-year swap spreads briefly hitting 75.75 basis points. "There is still a lot of the liquidity out there. Whether it will be put to use is the question," said Junkans.
"People are still re-evaluating risk and that will affect how big a factor liquidity is. In future that may affect some of the M&A activity that's going as these deals get a little bit harder to do as lenders tighten up their standards.
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