US Treasury prices surge

US Treasuries surged on Monday, posting the biggest single-day gains in over three years, as increasing credit market strains caused investors to aggressively seek the relative safety of government bonds.
Investors are worried that financial companies could be in for more large asset write-downs due to the fallout from the housing slump, and a reluctance among banks to lend to each other could slam economic growth.
"The Treasury market price action is being driven by a four-letter word that starts with F, and that is F-E-A-R," said William Sullivan, chief economist at JVB Financial Group in Boca Raton, Florida. Continuing the stream of bad news from banks, analysts at Goldman Sachs said HSBC, Europe's biggest bank, was likely to need a further $12 billion in provisions for its US subprime mortgage and home equity loans.
The Federal Reserve, meanwhile, said it would supply additional liquidity to the banking system through the end of the year in response to heightened pressures in money markets.
"We have been following the equity markets and as stocks go lower, bonds go higher," said Ted Ake, head of bond trading at Mizuho Securities in New York, adding "the Fed is doing everything it can to alleviate any kind of funding issues for the year but there is still a flight-to-quality tone to the market."
Benchmark 10-year notes traded 1-13/32 higher in price for a yield of 3.84 percent from 4.01 percent late on Friday. Yield on the 10-year note reached as low as 3.79 percent, its lowest since March 2004. Bond yields move inversely to prices.
Gains were the strongest on the long end of the Treasury yield curve, with the 30-year bond trading 2-12/32 higher in price for a yield of 4.29 percent from 4.43 percent late on Friday, making for the biggest single day dip in 30-year yields in over three years.
Two-year and 10-year note yields also had their biggest single fall in over three years. "The triple-digit sell-off in stocks is a factor, but there is a flight-to-quality bid in Treasuries," said David Coard, head of fixed-income sales and trading at The Williams Capital Group in New York.
At the end of September, Countrywide had borrowed $51.1 billion from the Federal Home Loan Bank system, a government-sponsored program. Despite the Treasuries price surge, gains in the short end of the market were limited by traders reluctant to push prices too high ahead of the auction of $20 billion of 2-year notes and $13 billion of 5-year notes later this week.
Two-year notes traded 11/32 higher in price for a yield of 2.88 percent from 3.07 percent late on Friday, while 5-year notes climbed 30/32 for a yield of 3.20 percent from 3.41 percent.