BLBG: U.S. 10-Year Notes Little Changed as Stocks, Production Decline
By Sandra Hernandez
Oct. 16 (Bloomberg) -- Treasury 10-year notes were little changed as stocks fell and reports showed manufacturing and industrial production slumped, boosting demand for the relative safety of government debt.
U.S. securities pared earlier losses as the reports fueled concern that a financial crisis that has toppled financial firms and frozen credit markets will drive the economy into recession. Traders earlier pushed up yields on speculation the U.S. will sell more debt to pay for a rescue of the financial system. U.S. stocks fell for a third day.
``There is the fear that the system is in peril, and that's leading people to sell stocks and buy Treasuries,'' said Charles Comiskey, head of U.S. Treasury trading in New York at HSBC Securities USA Inc., one of the 17 primary dealers that trade with the Federal Reserve. ``We saw some selling earlier in the morning and now this, the flight-to-quality bid.''
The 10-year note's yield was 3.95 percent at 11:39 a.m. in New York, according to BGCantor Market Data. It earlier rose to 4.06 percent. The price of the 4 percent security maturing in August 2018 gained 1/32, or 31 cents per $1,000 face amount, to 100 13/32.
The two-year yield rose 3 basis points, or 0.03 percentage point, to 1.57 percent, down from a high of 1.71 percent today.
Manufacturing in the Philadelphia region shrank in October at the fastest pace in almost two decades. The Philadelphia Fed's general economic index plunged to minus 37.5 this month, the lowest reading since October 1990, from 3.8 in September, the bank said today. Negative readings signal contraction.
`Subpar' Performance
Industrial production in the U.S. plunged in September by the most in almost 34 years, another report showed. The 2.8 percent decrease followed a revised 1 percent decline in August, the U.S. central bank said today.
The Standard & Poor's 500 Index tumbled 2.2 percent.
The U.S. economy may not improve until late 2009, Fed Vice Chairman Donald Kohn said.
``I see the most probable scenario as one in which the performance of the economy remains subpar well into next year and then gradually improves in late 2009 and 2010,'' Kohn said yesterday in remarks to the Georgetown University Wall Street Alliance in New York.
`Least Resistance'
Treasuries earlier fell as U.S. stock-index futures gained and banks' borrowing costs fell. The London interbank offered rate, or Libor, that banks charge each other for overnight dollar loans dropped 21 basis points to 1.94 percent, the lowest since November 2004, the British Bankers' Association said. That's down from a record 6.88 percent on Sept. 30.
Traders also speculated the Treasury will increase debt sales to relieve dislocations in lending markets and fund a $700 billion financial-rescue program. Rising supply tends to depress prices. President George W. Bush's administration said this week it plans to spend $250 billion of the rescue package buying stakes in financial firms to thaw a credit freeze that sparked a global stock rout.
``Short-term financing looks a little improved,'' said David Brownlee, who oversees $15 billion as head of fixed income at Sentinel Asset Management in Montpelier, Vermont. ``You're going to have massive amounts of Treasury supply coming. The path of least resistance for Treasuries right now is a little bit higher rates.''
The U.S. is likely to hold more frequent auctions of 10- year notes, reintroduce three- and seven-year securities, and increase sales of all maturities, as the U.S. funds its bailout plan, said Wrightson ICAP LLC in Jersey City, New Jersey, an economic advisory firm specializing in government finance.
To contact the reporter on this story: Sandra Hernandez in New York at shernandez4@bloomberg.net
