Treasuries Rise to the Highest in Two Years on Credit Concern

Treasuries rose to the highest since 2005 as credit-market losses related to delinquent subprime mortgages drove investors to the safety of government debt.

Two-year notes gained for a fifth straight week, extending their rally to the longest in eight months on speculation the Federal Reserve will cut borrowing costs a third time this year. The Fed will release minutes of its October meeting next week, and the Commerce Department is expected to report that housing starts fell to the lowest since 1993.

The market's pricing in an easing by the Fed, said Anne Briglia, senior fixed-income strategist in New York at UBS Wealth Management Research. Price action is being driven by institutional investors who are acutely aware of the broader financial stresses here.

The two-year note's yield fell 8 basis points, or 0.08 percentage point, to 3.34 percent this week, according to bond broker Cantor Fitzgerald LP. It reached 3.28 percent yesterday, the lowest since February 2005. The price of the 3 5/8 percent security due in October 2009 rose 1/8, or $1.25 per $1,000 face amount, to 100 17/32. Yields move inversely to bond prices.

Yields on 10-year notes decreased 5 basis points to 4.17 percent after yesterday touching 4.13 percent, the lowest since September 2005. They yielded 84 basis points more than two-year notes, the widest spread since March 2005. A steepening of the yield curve suggests investors are favoring shorter-dated notes in anticipation of rate reductions by the Fed.

A slump in global credit markets will force banks, brokerages and hedge funds to cut lending by $2 trillion, triggering the risk of a substantial recession in the U.S., Jan Hatzius, chief economist in New York at Goldman Sachs Group Inc., wrote in a report dated Nov. 15.

Goldman Forecast

Losses related to record U.S. home foreclosures using a back-of-the-envelope calculation may be as high as $400 billion for financial companies, according to Hatzius.

Citigroup Inc. and Merrill Lynch & Co. have led companies writing down more than $50 billion on securities linked to subprime mortgages. The risk of further losses by banks has pushed their borrowing costs above the average for investment- grade companies.

The credit stories continue, said Paul Horrmann, a strategist in Jersey City, New Jersey, at ICAP Plc, the world's largest inter-dealer broker. The addition of this one, of that one, add up to a sizeable amount, and we're starting to feel it. There is some doubt now about global growth.

In a sign of increased short-term credit risk, the three- month London interbank offered rate, or Libor, for dollars rose 7 basis points to 4.95 percent, the biggest weekly gain in two and a half months.

Fed Rate Outlook

Interest-rate futures on the Chicago Board of Trade showed a 84 percent chance that the Fed will lower its target rate for overnight lending between banks by an additional quarter- percentage point on Dec. 11. The Federal Open Market Committee cut the benchmark borrowing cost to 4.5 percent at its Oct. 31 meeting. Minutes will be released Nov. 20.

Fed Governor Randall Kroszner said yesterday in a speech in New York that an economic rough patch in coming months won't be enough to warrant additional rate cuts. St. Louis Fed President William Poole told Dow Jones that he's an optimist about credit market problems clearing up.

The Fed is trying to jawbone the market away from the view that they will ease again in December, said Thomas Atteberry, who oversees $2.8 billion in fixed income in Los Angeles at First Pacific Advisors LLC. We continue to see mortgage and credit problems worm their way into different places and causing concern for people.

Housing Starts

Housing starts probably fell in October to 1.17 million, the lowest since March 1993, according to the median forecast of 66 economists surveyed by Bloomberg News. The Commerce Department is scheduled to release the report Nov. 20.

U.S. debt was supported as a government report showed investors purchased the most Treasuries in September in six months. International demand for U.S. debt increased by $26.3 billion, compared with a loss of $2.8 billion in August.

Total holdings of equities, notes and bonds rose a net $26.4 billion after sales of a revised $70.6 billion in August, the Treasury Department said yesterday.

Source - Bloomberg