US Treasuries fell on Wednesday in choppy trading as the stock market staged a late rally, breaking free from recession fears that gripped it much of the session. Safe-haven bids for bonds ebbed and flowed, mirroring another rollercoaster session in equities, briefly pushing down yields to levels not seen since 2004.
Major US stock indexes powered into positive territory in late trading. A burst of buying of health care and other shares seen least vulnerable to an economic downturn sent the Dow and other indexes up more than 1 percent on the day.
Stocks rebounded from earlier lows and their weakest levels since August, when all financial markets were in the throes of the global credit crunch. "If you see equities rebound right now, you will see Treasuries correlate with that," said Sean Simko, head of fixed income investment at SEI Investments Co in Oaks, Pennsylvania.
Recent signs of deterioration across the economy outside of housing, in particular the labour market, have resulted in a growing group of analysts predicting a recession. Goldman Sachs said on Wednesday it expects the US economy will shrink in the second and third quarter by an average of 1 percent on an annualised basis during both of those quarters.
The benchmark 10-year Treasury note was down 12/32 at 103-14/32. Its yield, which moves inversely with its price, was 3.83 percent after briefly touching 3.76 percent, its lowest since March 2004. Late Tuesday it was at 3.78 percent.
The gloomy economic outlook, which has battered stocks in the early days of 2008, has emboldened bond bulls to place heavy bets that the Federal Reserve would slash benchmark US interest rates by an aggressive half percentage point at its January 29-30 policy meeting.
Interest rate futures implied traders are placing about an 80 percent chance of a half-point rate cut. Two-year debt, which is sensitive to the market's outlook on Fed policy, was down 3/32 in price at 101 to yield 2.73 percent. The two-year yield touched 2.63 percent, its lowest since November 2004. Late Tuesday it was at 2.68 percent.
Despite Wednesday's uptick, the two-year yield still reflects "a pretty dire set of economic circumstances," said Jamie Jackson, portfolio manager at RiverSource Investments in Minneapolis. "We are not there yet," he added. The two-year Treasury yield is running more than 1.50 percentage points below the Fed's current target rate.
Fed officials who spoke publicly this week have signalled that further rate cuts are likely to combat the heightened downside risks to the economy. But they also seemed to be tempering expectations that they would make huge rate cuts, given their concerns about inflation.
On Wednesday, St. Louis Fed President William Poole said inflation expectations are "quite well anchored," giving the Fed room for more rate cuts, but there is no clear evidence that a recession is at hand. Treasuries are poised for a choppy session on Thursday if stocks continue to seesaw, analysts said.