AP
10-Year Treasury Yield at 2 1/2 Year Low
Monday November 26, 5:47 pm ET
By Leslie Wines
Treasurys Rally on Credit Market Fears; 10-Year Yield Drops to Lowest Point Since June 2005


NEW YORK (AP) -- Treasury prices rallied dramatically Monday on more credit concerns, pushing the benchmark 10-year note's yield down to its lowest level in two and a half years.

Trading was dominated by a fresh set of worries about the impact of deteriorating below prime home loans on the credit and housing sectors; those concerns led investors away from risk and to again seek the safety of government bonds.

HSBC Holdings PLC Monday said it will move two of its structured investment vehicles, which contain some asset pools with exposure to sour home loans, onto its balance sheet. In the past many banks have kept structured investment vehicles off their balance sheets, obscuring their subprime problems.

HSBC also said it will provide up to $35 billion in funding for the SIVs. HSBC doesn't expect a near-term resolution of the funding problems faced by the vehicles that it and other banks hold.

There also are concerns that Citigroup Inc. needs to put its collateralized debt obligations onto its balance sheets. These debt instruments also have some exposure to the subprime market.

But analysts questioned whether price and yield levels were justified.

"But as we know, this market is not really based on fundamentals, said Kevin Giddis, managing director of fixed income at Morgan Keegan. "It is based on fear. Fear of the unknown."

The benchmark 10-year Treasury note rose 1 17/32 to 103 20/32 with a yield of 3.85 percent, down from 4.00 percent late Friday. The 10-year yield has not been this low since June 2005.

The 30-year long bond advanced 2 27/32 to 112 1/32 with a yield of 4.25 percent, down from 4.43 percent late Friday. Prices and yields move in opposite directions.

The 2-year note rose 9/32 to 101 9/32 with a yield of 2.94 percent, down from 3.07 percent late Friday. The 2-year yield dipped below 3 percent for the first time in almost three years last week.

Further buying in after hours trade pushed the benchmark yield down to 3.84 percent at 5:30 p.m. Eastern time from 3.85 percent at the 3 p.m. official close. Demand for the 30-year note lessened after the close, causing its yield to rise to 4.29 percent from 4.25 percent, while the 2-year note's yield dropped to 2.89 percent from 2.94 percent.

The 3-month yield dropped to 3.10 percent from 3.23 percent late Friday as the discount fell to 3.02 percent from 3.15 percent.

Investor wariness is so strong currently that even positive developments are looked on nervously, including a boisterous start to the holiday shopping season that suggests consumers could continue to drive the economy.

Retail sales on Friday and Saturday combined rose 7.2 percent to $16.4 billion from the same two-day period a year ago, according to ShopperTrak, which tracks total sales at more than 50,000 U.S. retail outlets. Throughout the country retailers offered stiff discounts to entice shoppers.

But analysts warned about reading too much into the figures.

"It would be a mistake to immediately believe that the strength apparent in this weekend's kickoff to the holiday shopping season will translate into strength for the season as a whole," said Tony Crescenzi, chief fixed income analyst at Miller Tabak.

"Consumers these days are under obvious strain, and it is therefore possible that their shopping 'splurge' was done more out of necessity than out of a desire to be ostentatious, with consumers seeking discounts because they had to, not because they wanted to," he said.

To help alleviate any end of year cash crunch, the Federal Reserve Bank of New York on Monday announced a series of steps to increase liquidity ahead of year-end.

The bank, noting "heightened pressure" in money markets that are expected to last through the end of the year, will inject $8 billion into the banking system on Wednesday in an unusually long six-week loan.

There are concerns that commercial banks will hoard their cash and not lend to each other in order to have cash on hand in the event they suffer losses from exposure to souring subprime mortgage assets.