Bonds driven higher by autos

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NEW YORK (CNNMoney.com) -- Treasury prices rose Monday, fueled by uncertainty about the nation's economic recovery after the Obama administration rejected turnaround plans submitted by U.S. automakers General Motors Corp. and Chrysler LLC.

Administration officials said Monday that both Chrysler and GM (GM, Fortune 500) had "unsustainable liabilities," and that a structured bankruptcy may be needed to free the companies from their bond holders. Still, the government gave the companies another chance at more federal money to fund their restructuring plans and become solvent.

Despite the administration's support, investors were still unnerved that the companies' plans were rejected. Millions of jobs are tied to the U.S. auto industry, along with hundreds of billions in federal, state and local tax revenue.

"The news underscores just how weak and troublesome the U.S. economic situation is and that we are likely settling in for a long recession," Kevin Giddis, managing director of fixed income at Morgan Keegan, wrote in a research report.

Jitters sent stocks tumbling, with the Dow Jones industrial average ending the day down more than 250 points, and investors returned to the perceived safety of the Treasury market. Stocks had mostly soared in March on renewed confidence in the government's economic recovery efforts.

Stocks and bonds have mostly traded in opposite directions during the recession, as confidence leads investors to want to take on more risk in the equity market, and anxiety usually takes investors to the safer bond market.

"Stocks have opened much weaker and that is only fueling the buying in bonds," Giddis said.

But Treasurys actually are on pace to rise overall in March as well, led higher by a Federal Reserve program to buy up $300 billion of government debt through August.

As part of its buy-up, the Fed bought $2.5 billion in Treasurys on Monday after buying $15 billion last week.

Monday's operation included debt that matures between August 2026 and February 2039. The Fed said more than $8 billion was submitted in response to the operation.

So far, the government purchases have supported bond prices and sent down yields, which move in opposite direction to prices. Treasurys prices eased after Monday's purchase operation but remained higher.

By purchasing long-term Treasurys, the Fed hopes to drive down interest rates on consumer and business loans and help ease the flow of credit. In addition to buying government debt, the Fed plans to buy another $750 billion in mortgage-backed securities.

The Fed expects to hold two to three purchase operations per week over the next six months.

Bond prices: The benchmark 10-year note was up 13/32 at 100 10/32, and its yield fell to 2.72% from 2.76% on Friday.

The 30-year bond gained 9/32 to 98 7/32, and its yield slipped to 3.6% from 3.61% on Friday.

The 2-year note rose 4/32 to 100 2/32, and yielded 0.86%, down from 0.92%.

The 3-month yield rose to 0.14% from 0.13%.

Lending rates: The 3-month Libor rate was 1.21%, down from Friday's level of 1.22%, according to data on Bloomberg.com. The overnight Libor rate rose to 0.29% from 0.28%.

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 were mostly unchanged. The "TED" spread fell to 1.07 percentage points from 1.09 points on Friday. The narrower the TED spread, the more willing investors are to take risks.

The Libor-OIS spread held even at 0.98 percentage point. A narrower spread indicates that more cash is available for lending.