US government debt prices gained for a second day on Wednesday, as recession fears and disappointing corporate earnings hurt stock markets world-wide and accelerated safety bids for bonds. The grim economic outlook overshadowed further signs of tentative improvement in the global money markets, where there was more evidence of the credit thaw from a decline in the interest rates that banks charge to lend to each other, which began about two weeks ago.
"Treasuries are trading off the drop of the equity market and in anticipation of additional deteriorating economic data," said Sean Simko, a fixed-income portfolio manager with SEI in Oaks, Pennsylvania. "We are working through credit issues," Simko said. "You are starting to see short-term markets trade again, which were so frozen you could ice skate on them. However, we still have the economic issues."
The sell-off in US stocks resembled an avalanche late in the day, with the Dow Jones industrial average losing5.7 percent to close at 8,519.21. Among the raft of disappointing profits and outlooks for US companies, the results of Dow components AT&T and Boeing missed expectations. Wachovia Corp reported a third-quarter loss of $23.9 billion on Wednesday, a record quarterly deficit for a banking company in the global credit crisis.
"We got another reminder with what's been going on both today with Wachovia and earnings disappointments yesterday that we are not out of the woods with respect to the economy and the financial sector," said David Coard, head of fixed-income sales and trading at The Williams Capital Group in New York. Such dismal financial or economic news "usually develops a flight-to-quality bid" into Treasuries, Coard said.
The sell-off of riskier assets world-wide was playing to the US currency's and dollar-denominated Treasuries' advantage, some analysts said, as the dollar roared up to a 2-year high against the euro. The benchmark 10-year Treasury note's price, which moves inversely to its yield, traded up 1-4/32 for a yield of 3.60 percent versus 3.74 percent late Tuesday. The 2-year Treasury note's price was up 7/32 for a yield of 1.51 percent versus 1.63 percent late Tuesday.
Underscoring the grim economic view was data showing a shaky US mortgage market, the epicentre of the global financial crisis. While credit supply has increased and corporate borrowing costs have fallen in recent days, they have not trickled down to US home buyers, according to an industry survey.