US Treasury debt prices surge

US Treasury debt prices rose on Monday, driven by falling stock markets and investors' concerns that problems in hedge funds with large subprime mortgage holdings could spill into financial markets.
Bond prices opened higher after foreign bond markets firmed in reaction to stock weakness overseas. Though US stock markets opened higher, at one point squeezing bond gains, they suddenly turned lower in midafternoon trade as subprime woes bubbled to the surface again.
As the stock rally stumbled, money found its way back into safe-haven Treasuries, pushing bond prices toward session highs. "Bonds are much more sensitive to stocks (than they have been recently) and (to) any other financial woes that might come from the Bear Stearns (hedge fund situation)," said Lou Brien, a strategist with DRW Trading Group in Chicago.
Problems at two Bear Stearns hedge funds, which made bad bets on collateralised debt obligations linked to subprime mortgages, have aroused worries about the spillover effect from the housing sector's woes. Last week, those fears boosted bonds and sparked a sell-off on Wall Street.
"Over the past couple of days, the dominant influence on Treasuries really has been concerns over subprime issues and the potential spillover effects from troubles at the hedge funds at Bear Stearns," said Michael Pond, Treasury and inflation-linked strategist at Barclays Capital in New York.
"It's still a flight-to-quality bid," said Mary Ann Hurley, vice president of fixed-income trading at D.A. Davidson & Co in Seattle. "People are risk-averse."
In late afternoon trade, the benchmark 10-year Treasury note was up 12/32 in price, yielding 5.09 percent compared with 5.14 percent on Friday and down from mroe than 5.30 percent less than two weeks ago.
The 10-year interest-rate swap, at 62 basis points, roughly matched its widest level late last week. A move out to 65 basis points would be the widest since 2003, one analyst said. The Dow Jones industrial average ended at 13,352.05, down 8.21 points, after being up more than 120 points earlier in the day.
Government bonds also got a boost from renewed hopes of a Federal Reserve interest rate cut by the end of the year and from more evidence of a weak US housing market.
May existing home sales fell 0.3 percent in May, confirming continued weakness in the housing sector. "The falling sales rate and near-record inventories of unsold homes suggests housing will be mired in a recessionary environment for the indefinite future and that's supportive for the fixed-income market," said William Sullivan, chief economist at J.V.B. Financial Group.
Short-term rate futures priced in a 44 percent chance the Fed will cut rates in 2007, up from 32 percent on Friday and 2 percent a week ago. Other reports earlier showed that the UBS/Gallup investors' confidence index fell sharply in June, while the Federal Reserve Bank of Chicago's gauge of the national economy remained mired in negative territory despite a modest improvement in May.