Nov. 21 -- Treasuries rallied, sending 10-year note yields below 4 percent for the first time since 2005, as a decline in global stocks spurred demand for the safety of government debt.
Bonds rose as U.S. equities fell and oil increased to within 71 cents of $100 a barrel. The spread, or difference in yield, between two- and 10-year notes widened to the most since early 2005 on speculation the Federal Reserve may have to lower interest rates again even as inflation accelerates.
``What we're seeing is a panic demand,'' said David Ader, head of U.S. government bond strategy in Greenwich, Connecticut, at RBS Greenwich Capital. ``Liquidity is a great problem.''
The yield on the 10-year note fell 8 basis points, or 0.08 percentage point, to 4.02 percent at 10:25 a.m. in New York, according to bond broker Cantor Fitzgerald. It touched 3.99 percent, the lowest since September 2005. The price of the 4.25 percent security due in November 2017 rose 29/32, or $9.06 per $1,000 face amount, to 101 29/32.
Yields on two-year notes decreased 16 basis points to 3.02 percent after touching 2.99 percent, the lowest since December 2004. They yielded 99 basis points less than 10-year notes, the most since January 2005. Yields move inversely to bond prices.
The steepening of the so-called yield curve suggests investors are buying shorter-maturity debt in anticipation of interest-rate reductions by the Federal Reserve.
Three-month Treasury bill yields have dropped 28 basis points this week to 3.14 percent, while the four-week bill yield has declined 43 basis points to 3.40 percent.
`Extremely Expensive'
Shorter-dated debt has become ``extremely expensive,'' said David Keeble, the London-based head of fixed-income strategy at Calyon, the investment-banking arm of Credit Agricole SA, France's second-biggest bank. ``We need continued bad news to keep yields at these levels,'' he said, adding that he expects two-year note yields to rise 10 basis points this week.
U.S., European and Asian stocks sank, with the Standard & Poor's 500 Index of U.S. stocks dropping 0.9 percent. Gold appreciated as oil's surge prompted investors to buy the precious metal as a hedge against inflation.
Two-year note yields have moved in the same direction as the S&P 500 index 81 percent of the time since Nov. 1, compared with 57 percent since the start of the year.
The Fed said in the minutes of its Oct. 31 meeting released yesterday that there's ``uncertainty'' about the outlook for U.S. economic growth, fueling speculation it will cut borrowing costs further. The minutes pushed the U.S. currency to a record low of $1.4856 per euro today.
Greenspan on Slump
Former Fed Chairman Alan Greenspan told a business forum in Toronto yesterday that the housing slump in the world's largest economy will curb attempts to revive the credit markets.
Progress ``has come to a halt,'' Greenspan said. ``The reason is increasing recognition that it's going to take a long while to get rid of those excess inventories of homes.''
Futures contracts on the Chicago Board of Trade showed a 90 percent chance the Fed will lower its target rate a quarter- percentage point to 4.25 percent next month and 79 percent odds of a further cut to 4 percent in January. The central bank cut its benchmark rate to 4.5 percent on Oct. 31.
The cost of borrowing dollars for three months rose to the highest in more than three weeks, according to the British Bankers' Association.
The London interbank offered rate, the amount banks charge each other for such loans, climbed 2 basis points today to 5.02 percent. That's 52 basis points more than the Fed's benchmark rate, the highest since Sept. 18, when U.S. policy makers cut the benchmark rate a half-percentage point.
Libor Increases
Three-month Libor for dollars has increased to 1.86 percentage points more than Treasury bill yields of the same maturity. The ``TED'' spread, as it is known, is the widest since Aug. 21 and up from 0.94 percentage point on Oct. 15. A wider gap is a sign that investors are concerned that credit- market losses will increase.
Treasuries remained higher after an index of leading U.S. economic indicators fell more than forecast in October, led by a plunge in building permits and an increase in firings, a private report showed.
The Conference Board's gauge fell 0.5 percent after a revised 0.1 percent increase that was smaller than previously estimated, the New York-based group said today. The measure points to the direction of the economy over the next three to six months.
Declining Confidence
American consumers lost confidence in November as fuel costs jumped and the housing market deteriorated.
The Reuters/University of Michigan final sentiment index dropped to 76.1 the lowest level since October 2005, following Hurricane Katrina. The index was at 80.9 in October.
Treasuries have returned 8.4 percent so far this year, according to Merrill Lynch & Co. data, compared with a 2.8 percent gain in German bunds, the benchmark government debt for Europe. The S&P 500 Index of stocks has returned 1.5 percent.
The turmoil that's roiled the credit markets ``isn't over yet,'' said Giles Gale, a fixed-income strategist in London at Royal Bank of Scotland Group Plc, the U.K.'s second largest bank.
The Securities Industry and Financial Markets Association recommended trading of Treasuries close at 2 p.m. New York time and stay shut tomorrow for Thanksgiving. It also recommended trading close at 2 p.m. New York time on Nov. 23.
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