10-year note yield sinks below 4%

NEW YORK (CNNMoney.com) -- The yield on the 10-year Treasury note fell below 4 percent for the first time in two years early Wednesday.

The 10-year note was later up 24/32 with a yield of 4.01 percent, down from late Tuesday's 4.09 percent.

The benchmark yield dropped below 4 percent around 1:45 a.m. ET. It had not been that weak since September, 2005, although it later managed to recover some ground as the U.S. session got under way, the Associated Press reported.

The 30-year long bond shot up 25/32 to 108 26/32 with a yield of 4.45 percent, down from 4.48 percent late Tuesday.

The 2-year note gained 10/32 to 101 3/32 with a yield of 3.03 percent, down sharply from 3.19 percent late Tuesday.

A gloomy U.S. economic outlook and speculation that the Federal Reserve could cut interest rates have worried investors and lifted bond prices - which move inversely to yields.

Government bonds rose beginning late Tuesday after the Federal Reserve released a new economic outlook that predicted a slowing economy in the next year. This raised hopes that the Fed will cut rates again when it meets in December.

Worries of a battered financial sector have also put a strain on markets as a string of mortgage lenders took hits from writedowns on mortgage-backed securities. The government-sponsored enterprises Freddie Mac (Charts, Fortune 500) and Fannie Mae (Charts) recently reported weak quarterly results on losses from mortgage defaults.

Several other large financial services companies - including Citigroup (Charts, Fortune 500), Merrill Lynch (Charts, Fortune 500), Washington Mutual (Charts, Fortune 500), and Bank of America (Charts, Fortune 500) - have also reported writedowns due to the subprime mortgage crisis.

The decline in yields has some positive implications for consumers, but is not a good sign for the economy. Many forms of consumer financing, including most 30-year fixed rate mortgages, are tied to the benchmark yield, the AP reported.

"Lower long-term interest rates would be extremely welcome in the housing market," Doug Porter, a BMO Capital Market economist, told the AP. He referred to the softness in residential home buying that has accompanied the collapse of the subprime mortgage market.

At the same time 10-year notes are a widely-held asset in the U.S. and many people will see weaker portfolio returns because of the drop in yields, according to the AP.

Wednesday morning, U.S. stocks also tumbled on worries about the mortgage market, sending investors flocking to the safe-haven of bonds.

In currency trading, the dollar fell to a new low against the euro and also fell to a two year low against the yen. Currencies have been climbing steadily against the dollar since August amid fears for the health of the economy.

The euro climbed to $1.4864, hitting the $1.48 mark for the first time Tuesday, while the yen fell to ¥108.60.

Surging oil prices have also driven up debt prices. Crude rose to a new intraday record within 71 cents of the $100-a-barrel mark.

Light, sweet crude for January delivery rose as high as $99.29 a barrel in electronic trading after the New York Mercantile Exchange closed, breaking the previous intra-day record of $98.62 on Nov. 7.

-- from staff and wire reports