Money world

U.S. government bond prices rallied on Friday on renewed concerns about banks’ exposure to bad mortgage investments and falling stocks.
Two-year note yields, which respond closely to expectations on moves in official interest rates, dipped briefly to three-year lows in the aftermath of Federal Reserve Chairman Ben Bernanke’s remarks on Thursday signaling willingness to cut interest rates sharply.
Investors sought the safety of government bonds as worries about the global credit crunch were stoked by a New York Times report saying Merrill Lynch could suffer $15 billion in losses from soured mortgage investments, almost twice the company’s original estimate. For details, see ID:nL11761219.
“The Merrill news was obviously negative and that may have got people twitchy this morning,” likely driving demand for the relative safety of Treasuries, said Charlie Smith, chief investment officer of Fort Pitt Capital Group in Greentree, Pennsylvania.
The benchmark 10-year note traded up 14/32 in price for a yield of 3.84 percent US10YT=RR, compared with 3.89 percent late on Thursday. Bond yields and prices move inversely.
Sliding U.S. equity markets helped boost Treasuries, analysts said.
Midmorning in New York, the Dow Jones industrial average .DJI> was down 1.4 percent at 12,670 points.
“Realistically, you look at the equity market today and think that the downside risks are higher than the upside potential,” said Don Kowalchik, a debt strategist at A.G free credit report.com. Edwards & Sons in St. Louis.
“You have a reverse flight. Yesterday people went to stocks: today they are going back to bonds,” he said.
After Bank of America said it agreed to buy mortgage lender Countrywide Financial Corp in an all-stock transaction worth approximately $4 billion, credit rating agency Moody’s said it may cut Bank of America’s ratings.
The Moody’s comment helped to bolster Treasuries further, said Kowalchik.
However, Treasuries pared some of their gains after Washington Mutual shares rose on a report of talks with JPMorgan Chase.
“The Treasury market is really getting whipsawed” as a result of the stream of news from the banking sector, said T.J Marta, fixed income strategist with Royal Bank of Canada Capital Markets in New York. Nonetheless, government bonds are likely to retain some of their safe-haven appeal until the extent of banks’ write-downs for risky investments becomes clearer, he said.
The two-year note traded up 5/32 in price for a yield of 2.62 percent, US2YT=RR versus 2.70 percent late Thursday.
Fed Chairman Bernanke said on Thursday the central bank is ready to take “substantive additional action” to support economic growth. His remarks also supported the short end, sending the yield curve — or gap between short-dated and long-dated Treasury yields — to its steepest since 2004.
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