Treasuries gained as investors turned to the safest securities amid signs the US economy won't rebound soon and as the government stepped up its mobilization of troops to combat terrorism.
"People will be very cautious and will go to the safest places, almost exclusively to Treasuries and" government agency securities, said Chris Mahony, who manages US$1.8 billion in debt at J&W Seligman & Co.
Treasury securities from three-month bills to 30-year bonds rose as investors bought them after selling US and European stocks and corporate bonds on concern a military conflict may push the global economy into recession.
The benchmark 5 percent note maturing in 2011 rose 12/32, or US$4.38 per US$1,000 face amount, to 102 13/32, driving the yield down 5 basis points to 4.69 percent. The 30-year bond gained 17/32 to 97, pushing its yield down 3 basis points to 5.59 percent and reversing a price decline in the first four days of the week that was sparked by concern the government's plan to ramp up spending could fuel faster inflation and force officials to scuttle a debt buyback plan.
Prospects of a deepening of the economic slowdown drove down the Commodities Research Bureau/Bridge Index -- an index of commodity prices such as oil and sugar -- for a fourth day, allaying the inflation concerns that had fueled the declines in the 30-year bond.
"The story of bonds coming under pressure because of government spending and no more surpluses has worked its way into the market and then some," said Chris Sullivan, who bought Treasuries due in eight years for the US$550 million he manages at the United Nations Federal Credit Union.
Afghanistan's ruling Taliban government refused to hand over Osama bin Laden, the prime suspect in last week's terrorist attacks, after US President George W. Bush made the demand, heightening the prospects for combat and pushing investors into the safety of Treasuries. While US government debt rose, government 10-year notes throughout Europe fell.
"Are we going to bomb Afghanistan? Are we going to suffer more terrorist attacks? Is the economy plunging into recession?" Mahony said.
Investors drove down yields on five-year Treasury notes as they anticipated the Federal Reserve will follow up Monday's half-percentage point cut in the benchmark overnight rate to 3 percent with another reduction at an Oct. 2 policy meeting in a bid to stave off recession.
Fourteen of 15 primary-dealer economists surveyed by Bloomberg News forecast the central bank will lower its target for the interbank overnight rate, known as federal funds, by at least 25 basis points to 2.75 percent at an Oct. 2 policy meeting. It would be the ninth rate cut this year, fueling gains in short-dated Treasury notes.
The implied yield on the October fed funds futures contract, an indication of what traders expect the average overnight rate to be that month, dropped to 2.47 percent. That level prices in expectations the Fed will cut its target to 2.5 percent at the Oct. 2 meeting, traders said.
The 4 5/8 percent note maturing in 2006 gained 2/32 to 103 12/32, lowering its yield to 3.82 percent. The yield on the 3 5/8 percent note maturing in 2003 rose 1 basis point to 2.88 percent. It's still down 62 basis points since the attacks, putting it near its lowest level since 1958, when Treasuries maturing in two years yielded 2.37 percent.
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