NEW YORK (CNNfn) - Short-term Treasury notes rallied Thursday, pushing yields to an all-time low, as traders bet the Federal Reserve would slash interest rates as U.S. markets crept back to life two days after Tuesday's terrorist attacks on the United States.
Expectations of interest rate cuts, seen as imminent either on or before the Fed's next policy makers' meeting on Oct. 2, propelled the short end of the market sharply higher, analysts said.
"People are clearly betting on an aggressive cut," said Bill Hornbarger, bond analyst at A.G. Edwards.
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 CNNfn's Lisa Leiter reports from Chicago Board of Trade. |
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Trading at the Chicago Board of Trade was hectic after the two-day hiatus, dealers said, adding that price quotes, especially early in the session, were difficult to get and may not be entirely accurate.
"There is a lot of uncertainty right now," said Bill Cunningham, chief bond strategist at J.P. Morgan, "we'll get back on track, but it's going to take time."
Trading closed early at 2 p.m. Two-year notes rose 13/32 to 101-7/32, pushing their yield to a record low of 2.98 percent. Five-year notes added 26/32 to 102-28/32, yielding 3.94 percent.
Ten-year notes gained 22/32 to 102-28/32, with yields down to 4.64 percent.
The 30-year Treasury bond yielded 5.38 percent, down from 5.44 percent at Monday's close.
Bonds' mixed picture
Looking forward, bonds are expected to continue to rise based on actions by the Fed and the direction of stock market trading, said Brian Wesbury, chief economist at Griffin Kubik, Stephens & Thompson.
Stocks, when they reopen Monday, are expected to decline. As Treasury notes tend to move inversely to stocks, that pressure should boost bonds.
Fed rate cuts also tend to boost bonds since they make bonds with higher interest rates more valuable.
Fed fund futures Thursday are pricing in a half-point rate cut, which gives a sense of investors' expectations for the Fed's actions. In addition, earlier in the day, the Fed signaled that it was trying to create some liquidity by injecting $70.2 billion in temporary reserves into the shaken U.S. financial system through a round of overnight fixed-system repurchase agreements.
The Fed has already cut rates seven times this year, to 3.5 percent from 6.5 percent, in an attempt to stimulate the sagging economy from falling into recession.
Recession fears grow
Consumer spending, which accounts for nearly two thirds of the U.S. economy, has been looked at as the final protection against recession. But consumer spending was dropping even before the tragedy, as key economic data released Thursday, but encompassing time periods before the attacks, illustrates.
The Labor Department said Thursday that new jobless claims jumped to 431,000 from a revised 410,000 the prior week, well above analysts' expectations. Rising joblessness impacts consumers' ability to spend and refuel the economy.
The University of Michigan's preliminary consumer confidence reading tumbled to 83.6 in September -- the lowest level this year -- from 91.5 in August. Economists had expected a reading of 90.8.
"I believe we were already in recession (before the attacks), but at least the consumer was holding up," Wesbury said. "Now we are virtually guaranteed to see spending fall. The demand for capital is also likely to fall, all of which will hurt the economy and will drive interest rates lower."
Dollar mixed
In currency trading, the dollar fell against both the euro and the yen. Trading volumes are said to have fallen by two-thirds since Tuesday and dealers now are eagerly watching the movement of the bond market for direction.
"We're not expecting a panicky financial market meltdown or much further dollar weakness," David Malpass, international economist at Bear Stearns, said in a note.
The euro traded at 91.16 U.S. cents, up from 90.70 cents late Wednesday. The dollar fell to ¥118.79, down from ¥119.37 late Wednesday.
The European Central Bank's decision to keep interest rates on hold -- despite concerns that a recession could be spawned by the impact of the terrorist attacks -- had little impact, as the market expected no change after ECB President Wim Duisenberg warned Wednesday against a rushed response.
Among the other factors being considered by traders was the Federal Reserve's swap of $50 billion for euros with the ECB in an effort keep European banks affected by the terrorist attack stable. European traders reported few settlement glitches. But with several bank dealing systems down in the United States, investors kept business to a minimum. 
-- Reuters contributed to this story
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