US Treasury debt prices jumped on Monday for a third straight session as steadily deteriorating credit conditions fired a strong safe-haven bid. Talk that a Wall Street firm could be running short on capital pushed down the 10-year Treasury note's yield to its lowest since January 23.
As financial shares led the broader stock market lower, benchmark 10-year notes rose 24/32 in price for a yield of 3.45 percent, versus 3.54 percent late on Friday. "Fears about counter-party risk are driving Treasury yields lower," said Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi UFJ in New York.
"There are these stories running that investors and banks and brokers are more risk-averse and not lending to each other. People are less confident about trading with counter-parties," Rupkey said, adding that stocks' decline gave the Treasuries' rally more impetus.
The financial sector weighed heavily on stock indexes. In particular, traders said Bear Stearns was rumoured to be having liquidity troubles after Moody's downgraded a swath of mortgage deals from Bear Stearns, with another batch placed on review for possible downgrade. But the firm's CEO called the rumour "totally ridiculous."
US interest rate swap spreads gapped wider on the chatter, adding to a growing laundry list of troubles affecting the financial sector. The benchmark US investment grade credit derivative index, an indicator of credit quality, jumped to a record high above 191 basis points on Monday according to Markit Intraday as investors' concerns grew that banks face additional write-downs from their exposure to risky home loans.
"There's stress in the markets," said Matthew Moore, economic strategist at Banc of America Securities. "People are scared about what else might be out there." There were signs the damage was spreading to private equity. Carlyle Capital Corp, an affiliate of Carlyle Group, said on Monday it has asked lenders for a standstill agreement as it faces more than $400 million in margin calls.
The firm said its creditors had significantly reduced the amount they were willing to lend against the company's portfolio of top-rated mortgage-backed debt due to the recent turmoil.
Elsewhere, private equity and real estate company Blackstone Group LP said challenging business conditions and a write-down of bond insurer FGIC led to a huge fourth-quarter slump in earnings. In addition, the head of Japan's financial regulator said global financial losses from the crisis have totalled $215 billion, with just over half coming from the United States.
Such events prompted Goldman Sachs to issue a research note saying it could not rule out an emergency Federal Reserve interest rate cut. The central bank has already slashed the target federal funds rate by 2.25 percentage points since mid-September to the current 3 percent.
Short term US rate futures have fully priced in a 75 basis point rate cut by the Fed's next regular policy meeting on March 18 and even a slight possibility of a 100 basis point cut. The two-year Treasury note's price rose 3/32 for a yield of 1.48 percent, versus 1.53 percent late Friday.