US government debt prices rallied on Friday, pushing benchmark yields to their lowest in more than two years as heightened credit concerns unleashed a fresh wave of safe-haven bids for Treasuries. Worries about the subprime debt fallout intensified after Fannie Mae, the biggest US mortgage finance company, said its quarterly net loss doubled from a year ago and forecast a steeper decline in home prices in 2008.
Wachovia Corp, the No 4 US bank, reported a $1.1 billion loss on risky subprime mortgage-backed securities. The revelations renewed this week's stock sell-off, spurring investors to scoop up low-risk assets like Treasuries in a shortened session ahead of a long holiday weekend.
The benchmark 10-year note was up 19/32 in price for a 4.22 percent yield, its lowest since September 2005 and down from 4.29 percent late Thursday. Prices and yields move inversely. The US bond market shut early at 2 pm (1900 GMT) and will be closed on Monday for the US Veterans Day holiday.
"Everyone is trying to get to higher ground into safety," said James Swanson, chief investment strategist at MFS Investment Management in Boston. One veteran Wall Street analyst said the current credit crisis is worse than one following the collapse of hedge fund Long-Term Capital Management in 1998. "This is the deepest correction we've ever seen in structured finance," said Jack Malvey, Lehman Brothers' chief global fixed-income strategist, in a Reuters interview.
As the credit cloud mushroomed the three major US stock indexes stumbled, led by the Nasdaq's 1.4 percent drop. Dwindling stock wealth, together with oil approaching $100 a barrel, elevated fears of a recession. The market's gloomy economic outlook and the severity of the credit turmoil have fuelled expectations that the Federal Reserve would lower benchmark interest rates again in coming months, analysts said.
US interest rate futures implied that traders now fully anticipate the Fed to trim the federal funds target rate by a quarter percentage point to 4.25 percent in December.
Friday's economic reports on import/export prices and consumer sentiment took a back seat to credit worries, but they supported the Fed's view of upside risks to inflation and downside risks to growth, traders said.
US import prices rose by a bigger-than-expected 1.8 percent in September, supporting the Fed's view on upside risks to inflation. Data pertaining to growth was mixed, showing a surprise September contraction in the US trade deficit, but a bigger-than-expected drop in the Reuters/University of Michigan index on consumer sentiment in early November.
Fears of more seismic credit and economic headlines will likely keep investors on the defence, bolstering demand for Treasuries in the foreseeable future, fund managers said. "I could see this (flight to quality) lasting into the middle of 2008," said Wayne Wicker, chief investment officer with Vantagepoint Funds in Washington.
Among other maturities, the two-year US Treasury note, which is the most sensitive to Fed policy outlook, was 4/32 higher in price to yield 3.41 percent, down from 3.49 percent late on Thursday. Early in the session, the yield dropped to its lowest since February 2005. The 30-year bond was up 1-5/32 for a 4.60 percent yield, down 7 basis points from late Thursday.
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