Bond prices soar as stocks fall
U.S. Treasurys rally on continuing fears over the sagging economy.
NEW YORK (CNNMoney.com) -- Bond prices rallied on Monday as the stock market sank on renewed fears over the financial sector and the health of the economy.
The benchmark 10-year U.S. Treasury bond rose 23/32 to 101 24/32, yielding 3.78% for investors, down from 3.87% late Friday. Bond prices and yields move in opposite directions.
The 30-year long bond jumped 1 5/32 to 101 22/32, and its yield fell to 4.39% from 4.46%.
Meanwhile the 2-year note rose 5/32 to 100 25/32 and yielded 2.32%, down from 2.40% in the previous session.
Weak economy: Wall Street struggled on Monday, with the Dow dipping more than 250 points in the afternoon session. Stock market weakness is an indication of continued economic struggle, said Michael Cheah, bond fund manager at AIG SunAmerica.
Investors look to Wall Street for a read on the economy. "The weaker stock market would lead some people to think that the economy could be weaker," said Cheah.
Mortgage security giants Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) have sustained massive losses during the credit crisis as consumers struggle to make mortgage payments. Talk of government interception to back up the lending giants has Wall Street jittery.
In addition, the potential buyout of investment bank Lehman Brothers (LEH, Fortune 500) has added fresh concern to market anxiety over the financial sector.
With the economy particularly weak, Cheah said that some people who have been hesitant to invest might be buying bonds for the first time on Monday. This "fresh money" could be supporting bond prices, said Cheah.
"The real fundamentals of the economy are still pretty much murky so when you have weak economic activity, people flock to treasurys," said Peter Cardillo, chief marketing strategist at Avalon Partners.
Government auction: Later in the week, there will be more than $50 billion worth of government debt sold at auction. There will be $32 billion worth of 2-year notes and $22 billion worth of 5-year notes auctioned off, according to Cheah.
A large influx of supply would typically send prices lower. However, "what we are seeing is a flight to quality in lieu of the Fed auctions," said Cardillo.
On Friday, traders were already anticipating the coming bond auction and sold their positions, according to Cheah, and those traders who sold bonds on Friday were expecting prices to fall further.
However, weakness in the stock market has pushed the prices of government bonds higher on Monday and so, unable to buy back their positions at a profit, bond traders were forced to buy back at a loss, according to Cheah.
As a bond trader, "on Friday morning, you would have pre-sold some bonds," said Cheah. However, "this morning you walk in, and see losses on your books." In this situation, most traders made the decision to buy bonds back, according to Cheah, which supported bond prices. 
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