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Treasurys fall as Poole predicts

Wednesday, January 9, 2008

NEW YORK (AP) - Treasury prices declined slightly Wednesday after a Federal Reserve official predicted stronger economic growth this year.

Although the price drops sent yields a bit above recent trough levels, analysts stressed that vigorous demand this year has kept yields on the 10-year and 2-year notes near their weakest levels in about three years. Prices and yields move in opposite directions.

Prices softened after St. Louis Fed President William Poole described the country's economic fundamentals as "strong" and said he thinks it is too early to tell whether the housing sector contraction will cause a recession. Poole said he thinks 2008 will be a year of rising growth, but predicted that it will take more time for the crisis in the credit markets to pass.

His remarks were at odds with a growing number of predictions from analysts that the economy is on the edge of recession.

"It is getting harder and harder to find an analyst, a government official or head of some financial services company to say something optimistic," said Kevin Giddis, managing director of fixed income trading at Morgan Keegan.

More commonly in recent sessions, fears of recession and weak economic reports have sparked Treasury rallies. Investors tend to prefer government-backed bonds when the economy appears to be in peril.

The benchmark 10-year Treasury note dropped 3/32 to 103 24/32 with a yield of 3.79 percent, up from 3.78 percent in late trade Tuesday, according to BGCantor Market Data. Earlier in the day the 10-year yield declined to 3.77 percent, its lowest standing since June 3, 2005.

The 30-year long bond fell 2/32 to 111 8/32 with a yield of 4.32 percent, up from 4.31 percent late Tuesday.

The 2-year note closed unchanged at 101 2/32 with a yield of 2.69 percent, up from 2.67 percent the day before. Early Wednesday the 2-year yield fell to 2.64 percent, its weakest level since Nov. 5, 2004.

The yield on the 3-month note fell to 3.21 percent from 3.26 percent as the discount rate dropped to 3.13 percent from 3.19 percent.

Investors often push short-term rates in the direction they expect central bank rates to go. So the multiyear lows for the 10-year and 2-year securities are a classic signal that investors expect the Federal Reserve to continue lowering rates.

The Fed cut the overnight Federal funds target by a full percentage point in late 2007 and investors hope for another cut at the central bank's next monetary policy meeting on Jan. 29-30.

On Wednesday Goldman Sachs predicted that the Fed funds target, currently at 4.25 percent, will drop all the way to 2.5 percent by the end of the third quarter. Goldman also joined a chorus of Wall Street institutions projecting a 2008 recession.

Joel Marver, a Treasury technical analyst at Thomson Financial, noted that the recent sharp gains for Treasury prices have occurred alongside a remarkably durable rally in nearly all the commodities markets.

In general commodities rallies puts pressure on Treasury prices, as more expensive staples tend to drive inflation higher. Inflation usually weakens prices in the bond market as it erodes the value of fixed-income.

"We have nearly every item in the Commodities Research Bureau index rising, and that classically is not good for bonds," Marver said. "The two markets cannot move in tandem this way if commodities keep surging. There is a disconnect in the two markets and eventually it should unravel."

So far in 2008 the commodities market has seen front-month crude futures trade above $100 a barrel for the first time and a new record high for gold futures

Posted by MOHAMED SAID at 2:13 PM  

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