US Treasuries up

US Treasury debt prices rallied on Friday as falling stocks and concerns about the health of the financial sector drove a bid for safe-haven government debt. Equities investors showed fresh concerns about banks, auto makers and the impact of higher oil prices on consumer spending and inflation. Major US stock indexes tumbled some 2 percent.
"Today, markets are concerned about more financial distress, with insurers being downgraded," said Michael Materasso, co-chair of the fixed income policy committee at Franklin Templeton Fixed Income in New York. "The downgrades could lead to some write-downs," he said.
"Given our outlook for the economy, Treasuries at these levels look attractive," Materasso added, noting he started to buy 10-year notes when the yield rose to 4.25 percent recently. Benchmark 10-year Treasury notes were up 17/32 in price. Their yields, which move inversely to prices, slipped to 4.14 percent. Late Thursday, Moody's Investors Service stripped the insurance arms of Ambac Financial Group and MBIA Inc of their triple-A ratings.
US stocks succumbed to one of several bouts of selling, driving safe-haven buying in government bonds, after credit rating agency Standard & Poor's said it may cut auto makers ratings, putting General Motors, Ford Motor Co and Chrysler LLC ratings on watch negative. "There's a lot of fear back in the market coming from several fronts," said Josh Stiles, senior bond strategist at IDEAglobal in New York.
Talk of a possible profit warning by Merrill Lynch and drops in shares of MBIA and Ambac after the Moody's action on Thursday added to worries about the health of the financial services sector and fed the safety bid for US government debt. A Merrill Lynch spokeswoman declined to comment on the rumours.
"There are funding pressures at quarter end in the interbank markets. We are getting into the world of people pre-announcing their bad earnings and there is a renewed focus on the fortunes of regional banks. That has helped Treasuries rally," said Steve Van Order, fixed income strategist with Calvert Asset Management Co in Bethesda, Maryland.
Bond traders were already focusing on next week's Federal Reserve policy meeting and a total of $50 billion supply via two- and five-year Treasury note auctions. "There was already worry about upcoming supply because the two-year notes will be auctioned a day before the Fed's policy statement and the five-year notes will be sold the day after the statement, so that makes the pricing tricky," Stiles said.
Besides those concerns, bonds are reacting to "cracks in the stock market, banks being under pressure, and oil and Middle East fears," he said. NYMEX crude oil prices rose after The New York Times cited US officials saying that Israel had carried out a large military exercise this month that looked like a rehearsal for a potential attack on Iran's nuclear facilities.
US crude oil futures rose above $134 a barrel. Higher oil prices are a negative for the US economy, denting consumers' spending power, and from that point of view are positive for bond prices. Two-year Treasury notes rose 5/32 in price for a yield of 2.86 percent. The 30-year Treasury bond's price rose 28/32 for a yield of 4.70 percent.