US Treasury debt prices tumbled and yields soared for a second straight day on Friday after the US government's dramatic steps to end a credit crisis reversed days of panic buying of safe-haven Treasuries. Benchmark 10-year Treasury note yields posted their biggest one-day rise in nearly four and a half years.
Traders unwound safe-haven positions on hopes that the system-wide measures by the Federal Reserve, the US Treasury Department and Congressional lawmakers would end the market turbulence that led to the demise of 11 US commercial banks and a trio of top investment banks, analysts said. Two-year notes fell 29/32 in price to yield 2.21 percent, up from 1.73 percent late Thursday.
"There's less fear, more liquidity, and the possibility that the Federal Reserve might cut the federal funds rate seems diminished so Treasury yields that hit almost rock bottom in the last few days got back to where they were a couple of weeks ago," said Stuart Hoffman, chief economist for PNC Financial Services Group in Pittsburgh, Pennsylvania.
The most dramatic aspect of the government's moves was a plan to take hundreds of billions of dollars' worth of illiquid mortgage assets off banks' books. Removing those illiquid assets from bank balance sheets "will give banks the ability to provide capital and loans to businesses and consumers and carry out their normal function of financing economic growth," Hoffman said.
In another extraordinary move, the US said it would use $50 billion to back money-market mutual funds. It joined the United Kingdom in temporarily banning bets that financial stocks will fall.
The sweeping government measures to rescue the financial system and restore confidence in shaky markets spurred a huge relief rally in US stocks, another reason investors shunned safe-haven Treasuries after embracing them early in the week. The Standard & Poor's 500 Index rose 4 percent while the Dow Jones industrial average and Nasdaq Composite Index each climbed more than 3 percent.
"It's a reversal of what happened in the market in the prior two days," said Michael Moran, chief economist at Daiwa Securities America in New York, adding: "Investors sought quality and liquidity on Wednesday and Thursday and were willing to pay almost any price to buy Treasury securities. Now that market participants realise that Congress and the Treasury and the Fed are working on longer-term solutions to problems in the mortgage-backed securities market, they are more relaxed about the economic environment and they unwound some of the flight to quality from the prior few days."
The government's moves came at the end of a week that witnessed the bankruptcy of Lehman Brothers, a government bailout of giant insurer AIG, and the sale of Merrill Lynch to Bank of America. The rapid onslaught of such dramatic financial events led multibillion-dollar money market funds to face sudden cash withdrawals by institutional investors and caused a credit squeeze that could have forced businesses and consumers to cut spending even more than they have already.
The three-month Treasury bill rate jumped to about 0.99 percent versus 0.26 percent before the announcement of the Treasury's money market plan. The three-month bill yield hit its lowest since the 1950s on Wednesday.
Among longer maturities, benchmark 10-year notes fell two full points in price to 101-20/32. Their yields, which move opposite to price, rose to 3.80 percent from 3.56 percent late Thursday. Five-year Treasuries fell 1-25/32, their yields rising to 3.03 percent from 2.65 percent late on Thursday. Thirty-year bonds fell more than three full points, their yields rising to 4.40 percent from 4.20 percent.
Comments
Comments are closed.