Bonds rally as stock selloff accelerates
Recession fears and a plunging stock market have investors rushing to the safety of government bonds despite massive supply concerns.
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| Click on the chart to see other government bond prices and yields. |
NEW YORK (CNNMoney.com) -- Government bond prices rallied Friday, as shell-shocked investors retreated from Wall Street.
Stocks were getting hammered on Friday amid worries about the health of the financial sector and talk of bank nationalization. On Thursday, the Dow slid to a 6-year low.
"If equities get hit hard, elements of the bond market are well bid in a flight to quality," said Brian Edmonds, Head of Interest Rate Trading at Cantor Fitzgerald.
Investors remain skeptical that President Obama's efforts to reignite the economy with a $787 billion stimulus package and a$75 billion foreclosures-prevention plan will be enough.
"I continue to expect Treasurys to be very, very volatile in here," said Mary Ann Hurley, vice president of fixed income trading at DA Davidson. "Next week, when we get closer to the auctions, supply will move closer to the forefront."
The Treasury announced $94 billion worth of auctions slated for next week. That tally dwarfs the $67 billion quarterly refunding last week.
As the massive amount of supply comes to market, Edmunds said investors should brace for a volatile ride. "Bonds can easily move 3, 4 points a day and that is just what is going on in the new market," he said.
A government report released Friday showed that consumer prices ticked up slightly in January, the first rise since July, but held steady on a year-over-year basis. Inflation decreases the value of fixed-income returns, but when prices slow their climb, fixed-income assets become more attractive.
"Pretty much every market participant will say that the concern of the Fed is deflation, not inflation," said Hurley. Deflation inhibits the economic growth, which supports bond prices. "Although I don't think anybody wants to see deflation take hold," added Hurley.
Bond prices: On Friday, the price of the 10-year note rose 24/32 to 99 26/32 and its yield fell to 2.78% from 2.86%. Bond prices and yields move in opposite directions.
The 30-year bond jumped 1 27/32 to 98 24/32, and its yield fell to 3.57% from 3.68%. The long bond had surged as much as 3 points during afternoon trade.
The 2-year note edged up 3/32 to 99 28/32 and its yielded ticked down to 0.95% from 0.99%.
The yield on the 3-month note dipped to 0.27% from 0.32% late Thursday. Demand for the shorter-term note is seen as a gauge of investor confidence.
Lending rates: The 3-month Libor rate remained unchanged Friday at 1.25%, according to data on Bloomberg.com. The overnight Libor rate, meanwhile, dipped to 0.28% from 0.29%.
Libor, the London Interbank Offered Rate, is a daily average of rates that 16 different banks charge each other to lend money in London.
Two credit market gauges showed decreasing confidence in the credit markets. The "TED" spread widened to 0.98 percentage point from 0.95 percentage point. The bigger the TED spread, the less willing investors are to take risks.
The Libor-OIS spread increased to 1.03 percentage point from 1 percentage point. The bigger the spread, the less cash is available for lending. 
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