US government debt prices edged up on Friday as resurgent credit worries sparked demand for safe-haven Treasuries, propelling benchmark 10-year notes to their best week in nearly two months. Bonds gained following news late Thursday that American International Group, the world's largest insurer, posted a record $7.8 billion quarterly loss. US stock indices also fell sharply.
"Every time the stock market gets weak you start to see that safe-haven bid come back into play. AIG's earnings were miserable and that affected the financials," said Joe Keetle, senior wealth manager at Dawson Wealth Management in Cleveland, Ohio.
The dismal AIG results fanned doubts about a recovery in credit markets. Other financial companies including Swiss bank UBS and US home-finance company Fannie Mae have recently announced asset write-downs and credit losses stemming from subprime mortgages. Credit fears have dragged equity markets from their recent peaks, and benchmark 10-year Treasury yields from their four-month highs reached earlier this week.
"Even if you have turned the corner and the worst is behind us on the risk aversion side, markets are still concerned that there is still bad news that will come out on the asset-quality side that has kept markets jittery and led to a drop in Treasury yields in the past few days," said Robert Tipp, chief investment strategist with Prudential Fixed-Income Management in Newark, New Jersey.
The benchmark 10-year note's price, which moves inversely to its yield, rose 2/32 for a yield of 3.77 percent, down from 3.78 percent late Thursday. The yield briefly moved above 3.95 percent just two days ago. Major US stock indexes were down as much as 0.8 percent following a 2 percent drop in Tokyo and a 1 percent fall in Europe.
Another positive factor for Treasuries was the roughly $70 billion investors received on maturing US government bonds from the Treasury quarterly refunding this week. Investors plowed back some of this record amount of cash into Treasuries in anticipation of seasonally strong performance after the May refunding, analysts said.
Bonds' gains were mitigated by a bigger-than-expected narrowing in the March trade deficit, boosting the prospects of an upward government revision on first-quarter gross domestic product, analysts said. A stronger first-quarter GDP reading will support the view that the US economy would avoid a recession and alleviate pressure on the Federal Reserve to trim short-term interest rates further, analysts said.
The Treasury market also traded off its initial highs on some reassuring comments from Citigroup's new chief executive, Vikram Pandit, after the largest US bank unveiled a plan to sell $400 billion of assets in a bid to become more efficient and profitable.
Citi has suffered hefty losses from the subprime mortgage debt crisis and its fallout.
"Pandit is selling his program well. People are a little less fearful and they are taking some profits on bonds," said Andrew Brenner, senior vice president at MF Global in New York, said of the Citi's CEO remarks in conference call with analysts and investors.
Still, there are plenty of downside risks to the economy, including persistent bottlenecks in the credit markets and a relentless surge in oil which hit a series of record highs this week. US crude broke above $126 a barrel on Friday. Two-year notes dipped 1/32 in price for a 2.25 percent yield, versus 2.23 percent late Thursday. The two-year yield was on track for its biggest weekly drop since March. Thirty-year bonds, after Thursday's well-bid reopening auction, traded up 8/32 for a yield of 4.51 percent versus 4.55 percent late Thursday.
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