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Treasurys rise on low-grade debt worries

February 12, 2008 | "Associated Press"

Report from American International Group raises concerns about 'collateralized debt obligations.'

Long-term Treasury prices rose Monday after news of problems at American International Group again raised concerns about risky low-quality debt.

The insurer said it will make more information public about the methods it used to value the complicated debt pools known as collateralized debt obligations, or CDOs. These assets are a major concern to investors because CDOs contain some subprime debt instruments that are likely to default and it is widely suspected their current prices do not reflect that liability.

AIG (AIG, Fortune 500) also said it had been told there was some weakness in its internal controls at the end of 2007.

Worries about subprime mortgages and other poor-quality debt have fueled a string of vigorous rallys for Treasurys since last August, as risk-averse investors have opted for the safety of government-backed bonds.

"There is fear in the market that there will be more negative headlines on this," said Tom di Galoma, head of Treasurys trading at Jefferies & Co.

However, the gains lightened as the session wore on and the stock market cast off morning weakness to post moderate gains. The stock and bond markets often trade in opposite directions.

Stingy shoppers could weigh on market

The benchmark 10-year Treasury note gained 8/32 to 99 with a yield of 3.62%, down from 3.65% late Friday.

The 30-year long bond gained 9/32 to 100 5/32 with a yield of 4.40%, down from 4.43%. The 2-year note rose 1/32 to 100 13/32 with a yield of 1.92%, down from 1.93%.

The yield on the 3-month note rose to 2.27% from 2.23% late Friday as the discount rate advanced to 2.22% from 2.18%.

The subprime crisis was also discussed at length over the weekend at a meeting of the Group of Seven finance ministers in Tokyo. After the global economic summit, German Finance Minister Peer Steinbruck said the group fears that losses on securities due to subprime exposure in time will total $400 billion.

The finance chiefs also expressed concern that it is still unknown where much of the subprime pain will emerge, as collateralized debt obligations were sold to institutional and government investors around the world.

And subprime debt is not the only risky asset class that investors are worried about. In recent sessions there also have been concerns about a possible wave of defaults on the low-rated corporate loans that were used to finance a leveraged buyout boom in 2006 and 2007.

Investors suspect that banks will try to sell off these leveraged loans at bargain rates to get them off their books soon.

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