January 15, 2008 |
|Investors abandon the traditional safe haven of bonds as signs of possible rate cut flatten rally.|
Treasury prices ended mixed Monday after investors turned their attention back to stocks and bonds forfeited much of their safe-haven allure.
Worries about a possible recession have stoked strong demand for Treasurys and other assets that carry a safety premium in the year to date. The fear is that the contagion from subprime mortgages and a deteriorating housing sector will infect the rest of the economy.
But price action was more indecisive Monday and confined to a tight range as investors monitored developments in other markets. The day's news featured a rally in stocks, a historic rise in gold futures above $900 an ounce and a new high for the euro at $1.49.
Kevin Giddis, managing director of fixed income trading at Morgan Keegan, noted a waning of last week's "fear-laden price rally."
The benchmark 10-year Treasury note closed unchanged at 103 23/32 with a yield of 3.79 percent, the same level where it ended late Friday.
The 30-year long bond gained 8/32 to 110 9/32 with a yield of 4.37 percent, down form 4.38 percent late Friday. Prices and yields move in opposite directions.
The 2-year note fell 1/32 to 101 9/32 with a yield of 2.58 percent, up from 2.57 percent at its close on Friday.
The yield on the 3-month note fell to 3.18 percent from 3.11 percent late Friday as the discount rate dropped to 3.04 percent from 3.18 percent.
The worries about economic weakness and recent pointed remarks by Federal Reserve Chairman Ben Bernanke have left many investors convinced that the Federal Reserve will reduce the overnight Federal funds target at its next meeting Jan. 29-30.
On Monday there was speculation that the sharp rise in gold prices and the new low for the dollar could even compel the Fed to cut rates before the scheduled meeting, according to Ashraf Laidi, chief foreign exchange analyst at CMC Markets.
Recession a big worry but not likely: Moody's
The recent Treasury rallies have featured very strong demand for 2-year notes, which are the most rate-sensitive. These rallies have pushed the yield on 2-year notes to its lowest level in almost three years.
The difference between the yields of 2 and 10-year notes, popularly known as the yield curve, on Monday was 1.23 percentage points, its greatest gap in three years, according to Laidi's calculations. This is a classic signal that investors expect the Fed to cut rates as they often push short-term yields in the direction that they believe official rates will take.