US Treasury debt prices were mixed on Thursday with strong selling in shorter-dated bills as investors unwound recent flight-to-safety bids on speculation central banks are dealing with recent credit turmoil.
Investors have been buying bonds and moving away from equities over the past few weeks in the search for a safe haven from troubles in the credit market that began in the subprime mortgage sector. Buying has been acute in the shorter-dated T-bills in recent days, with three-month T-bill yields on Monday marking their biggest single-day drop since the stock market crash of October 1987. Bond yields move inversely to prices.
But those T-bill yields surged on Thursday, with the 1-month bill yield rising to its highest level this week amid talk that efforts by central banks to loosen tightening credit markets may be having some impact.
"Investors are beginning to look around and trying to find deals, whereas before they were just hiding their heads in the sand and not touching anything other than Treasuries," said Ted Ake, head of bond trading at Mizuho Securities in New York. The Federal Reserve Bank of New York added a larger-than-usual amount of fresh funds to the system on Thursday, pumping a total of $17.25 billion into the banking system through three separate repurchasing agreements.
Last week the central bank cut the rate at which it lends money to banks, and on Wednesday several top banks said they took the rare step of borrowing over $2 billion in total from the Fed through the so-called discount window.
"After several weeks of market turbulence, the normalisation of money markets is under way following action from central banks," said Cyril Beuzit, head of rate strategy at BNP Paribas in London.
Benchmark 10-year Treasury notes were trading 3/32 higher in price for a yield of 4.64 percent from 4.65 percent late on Wednesday, while two-year notes were 2/32 lower in price for a yield of 4.23 percent from 4.19 percent.
Two-year yields traded as high as 4.32 percent overnight as overseas equity markets gathered strength, but moved back down as Wall Street traders proved more reticent buyers. Equities turned lower on Thursday after Angelo Mozilo, the chief executive of troubled mortgage lender Countrywide, said the US housing slump could push the economy into recession.
Despite Mozilo's comments, investor had already taken some solace from news late on Wednesday that Bank of America Corp was investing $2 billion in Countrywide Financial Corp, the largest US mortgage lender, helping to quell fears that Countrywide might fall into bankruptcy and further spread credit troubles.
The easing of fears of contagion helped to cap bond market gains on Thursday. The 5-year note was trading 2/32 lower in price for a yield of 4.40 percent from 4.38 percent late on Wednesday, while the 30-year bond was 15/32 higher in price for a yield of 4.94 percent.