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Treasurys fall on stock market rebound

January 17, 2008 | "Associated Press"

Government bonds fall slightly after shares in some sectors show surprising strength.

Treasury prices fell Wednesday after the stock market showed strength in some sectors.

Treasurys came under pressure after a broad-based heavy sell-off for equities failed to materialize a day after the Dow Jones industrials tumbled nearly 280 points. In general, the stock and bond markets have traded in opposite directions this year as investors struggle to understand whether the economy is sliding into a recession.

There were heavy losses for many technology stocks Wednesday after a dismal earnings report from Intel (INTC, Fortune 500), but the overall selling was far less intense than feared and investors reacted positively to earnings from JP Morgan Chase & Co (JPM, Fortune 500)., the nation's third largest bank by market capitalization.

"The better-than-expected performance for stocks has stalled Treasurys a bit," said Tom di Galoma, head of Treasurys trading at Jefferies & Co.

The benchmark 10-year Treasury note fell 9/32 to 104 17/32 with a yield of 3.70 percent, up from 3.68 percent in late trade Tuesday. During trade on Tuesday, the 10-year yield dropped to its weakest level in almost four years.

The 30-year long bond fell 19/32 to 111 19/32 with a yield of 4.31 percent, up from 4.30 percent the day before.

The 2-year yield lost 1/32 to 101 13/32, with a yield of 2.50 percent, up from 2.49 percent.

The Federal Reserve's latest "Beige Book" survey of regional economies showed that the broader economy grew through December. But the pace of expansion was slower than it was last fall. Credit problems intensified in December, as did troubles in the housing market. That threw Wall Street into a fresh bout of turbulence, the Fed found.

There have been persistent market rumors this week that the Fed will have to take drastic new steps to lower rates to breathe life into a rapidly deteriorating economy. The central bank's monetary policy committee's next scheduled meeting is Jan. 29-30. Fed Chairman Ben Bernanke has sent pointed signals that the bank is prepared to lower its benchmark federal funds rate again after implementing cuts totaling 1 percentage point in late 2007.

This week's rumors in both the bond and foreign exchange markets have had it that the Fed may hold a special session to put in place a rate cut before the meeting. There is also speculation that the Fed could make a full point reduction.
The Federal Reserve's latest "Beige Book" survey of regional economies showed that the broader economy grew through December. But the pace of expansion was slower than it was last fall. Credit problems intensified in December, as did troubles in the housing market. That threw Wall Street into a fresh bout of turbulence, the Fed found.

There have been persistent market rumors this week that the Fed will have to take drastic new steps to lower rates to breathe life into a rapidly deteriorating economy. The central bank's monetary policy committee's next scheduled meeting is Jan. 29-30. Fed Chairman Ben Bernanke has sent pointed signals that the bank is prepared to lower its benchmark federal funds rate again after implementing cuts totaling 1 percentage point in late 2007.

This week's rumors in both the bond and foreign exchange markets have had it that the Fed may hold a special session to put in place a rate cut before the meeting. There is also speculation that the Fed could make a full point reduction.
Jefferies' di Galoma discounted the emergency meeting scenario, noting that the central bank likely would not want to rattle already jittery investors with a surprise action. However, he said technical indicators suggest an unusually large rate cut is growing increasingly likely. Rate reductions of even a half point are relatively rare.

Wall Street to Fed: Cut rates now!

Investors are focused on the fact that the gap between the yield on the Fed funds target, now at 4.25 percent, and the yield on the 2-year Treasury note has reached a full 1.75 percentage points, the widest difference ever.

The fact that the rate-sensitive 2-year yield, now at 2.50 percent, is well below the Fed funds rate is very worrisome. Usually, the 2-year yield trades above the Fed funds rate.

"This shows how far behind the curve the Fed is," said di Galoma. "It is a sign that things are growing worse and the Fed will have to do something."

Although the bond market usually tracks inflation data carefully, there was limited reaction to the latest consumer-level inflation data as investors remained preoccupied with rates and growth problems.

The Labor Department said Wednesday that consumer prices in December showed an increase of 0.3 percent for the headline figure and a 0.2 percent advance for the core rate, which strips out often-volatile food and energy prices. Both figures had been expected to rise by 0.2 percent, according to Thomson/IFR.

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