US Treasury debt prices rose on Tuesday as renewed credit fears triggered a stock market sell-off and revived appetite for safe-haven government debt. Credit worries ratcheted higher after Swiss bank UBS AG posted another $5 billion in write-downs and J.P. Morgan Chase & Co, the No 3 US bank, said it has suffered $1.5 billion in losses so far this quarter.
Not even Goldman Sachs, which has been relatively unscathed by the credit crunch that has pummelled its Wall Street rivals, was immune. Three analysts downgraded their outlook on the biggest US securities firm, citing continued pressure on the financial markets.
"Today we saw a safe-haven trade into Treasuries due to concerns about financials," said Brian Edmonds, head of rates trading at Cantor Fitzgerald in New York. Concerns about credit woes in the financial sector and the ongoing pullback in commodity prices overshadowed a surprise contraction in the US trade deficit in June and a pause in the recent surge in the dollar, analysts said.
Some traders have pulled money out of the red-hot oil and commodity markets and shifted it into US stocks and bonds, Edmonds said. "There's a correctional flow into the dollar with pretty good flows out of oil and commodities," he added. US crude futures shed $1.44 to settle at $113.01 a barrel, or about 23 percent below the record set in July.
The US benchmark 10-year Treasury note jumped 21/32 in price to 100-22/32. Its yield, which moves inversely to its price, fell to 3.92 percent down from 4 percent on Monday. Two-year Treasuries' price rose 7/32 to yield 2.45 percent, down from 2.56 percent late on Monday. On Wall Street, the three key US stock indexes ended down as much as 1.2 percent in light trading.
Major global central banks have been creating new ways to keep money moving within the financial system, which has been squeezed by the billions in write-downs and losses stemming from the credit crunch. On Tuesday, the Federal Reserve and the European Central Bank co-ordinated simultaneous auctions of 84-day dollar loans in a bid to help banks to repair their balance sheets. These debut auctions garnered solid demand, which suggested persistent needs among banks for funds, analysts said.
Banks' credit woes have been a principal factor that led some economists to forecast for the US economy to contract in the second of half of 2008. Dallas Fed President Richard Fisher told the Dallas Morning News that US growth could hit zero in the second half of the year. Among other cash maturities, five-year notes were up 17/32 for a yield of 3.15 percent, down 12 basis points from late Monday, while 30-year bonds rose 31/32 to yield 4.55 percent from 4.61 percent late Monday.