Treasuries Rise As Stock Rebound Fizzles

Treasury prices threw off early weakness and turned higher Tuesday as the stock market wavered and investors wrestled with fears about widening debt problems.

Investors have generally favored Treasurys and punished stocks in recent sessions, scurrying to minimize their exposure to the debt crisis by loading up on government-backed bonds.

On Tuesday some investors ventured back into the stock market in search of bargains after declines over the past week sent prices to attractively low levels. But Wall Street turned mixed in late morning as some investors once more choose the safest route and loaded up on Treasurys.

"Treasurys are just playing off the stock market," said Shubha Jayaram, Treasury analyst at IDEAGlobal.com. "There is little economic news and so far no negative news has come out about the financial sector."

Analysts at Action Economics said unconfirmed rumors about major mortgage-linked losses for Goldman Sachs & Co. Inc. helped push Treasury prices higher. The firm has denied a similar rumor earlier in the week and the economics firm said another denial is likely on the way. But rumors are having an unusual influence in a nervous market, nonetheless.

In the past week, both Citigroup and Merrill Lynch & Co. Inc. have lost their top executives, largely due to the leaders' failure to protect their institutions from assets linked to home loans made to borrowers with poor credit.

There is great tension in the lending markets this week, and analysts say there appears to be an unwillingness by banks to lend in case they need new cushions against more losses on mortgages and related debt.

The benchmark 10-year Treasury note rose 5/32 to 103 12/32 with a 4.32 percent yield, down from 4.34 percent late Monday. Prices and yields move in opposite directions.

The 30-year long bond advanced 5/32 to 106 with a 4.63 percent yield, unchanged from late Monday.

The 2-year note gained 3/32 to 99 31/32 with a yield of 3.64 percent, down from 3.68 percent late Monday.

Treasury market participants also are monitoring the dollar, which fell to a new low of $1.4569 against the euro, and commodities, which are surging as the dollar falls. Light, sweet crude for December delivery traded above $97 for the first time on the New York Mercantile Exchange.

The combination of a faltering dollar and spiraling commodities prices is worrisome to the bond market because it is likely to heighten inflation. The bond market detests inflation because it dents the value of fixed-income.

In addition, higher inflation would dampen the interest rate outlook. The Federal Reserve has reduced the federal funds rate by a full 0.75 percentage point during the past two months. Many analysts think the credit market turmoil and weakness in the economy will force the central bank into making more rate cuts soon.

However, a surge in inflation would pressure the Fed to maintain the fed funds target at its current 4.50 percent level or even lift it, scenarios the bond market does not want to see.

Traders also are selling Treasurys ahead of a Wednesday offering of $13 billion in new 10-year notes. Investors typically get rid of older issues to make room in their portfolios for new notes.