Treasurys climb

NEW YORK (CNNMoney.com) -- Treasurys rose Thursday as grim economic and corporate news sent stock prices sharply lower.

The retreat to ultra-safe Treasurys came as the Dow and S&P500 fell back to their lowest levels since 1997 after recovering some ground in the previous session.

Stocks opened lower following a big selloff overseas and news that auditors have "serious doubts" about General Motors' (GM, Fortune 500) ability to survive the current slump in sales and the credit crisis.

The selling gained momentum amid a flurry of lackluster economic reports. Bank shares were hit particularly hard and Citigroup Inc. (C, Fortune 500) fell below $1 a share for the first time. The Dow Jones industrial average ended the session down 281 points, below 6600.

"Support is coming from the headlines," said Steve Van Order, chief fixed income strategist at Calvert Funds.

"You know the asset class is hugely overvalued from a long-term perspective," Van Order said about Treasurys. "At the same time, you know why people are continuing to favor them in this economic environment."

Treasury notes are considered one of the most secure assets available. As a result, prices for Treasurys often climb when stock prices fall as demand for safety outweighs investors' appetite for risk.

Economy: The gloomy tone was set by a raft of government reports highlighting the challenges facing the U.S. economy.

A report from the Labor Department said the number of Americans filing initial claims for unemployment benefits fell last week, but claims remain at historically high levels.

That report comes one day before the government's closely watched monthly jobs report, which is expected to show that the economy lost 650,000 non-farm jobs in February, after losing 589,000 in January. The unemployment rate is expected to rise to 7.9% from 7.6%, according to economists surveyed by Briefing.com.

Government data also showed U.S. business productivity was weaker than previously estimated in the fourth quarter, while factory orders fell nearly 2% in January.

Meanwhile, the delinquency rate on residential mortgages rose to a record high in the fourth quarter, a report from the Mortgage Bankers Association showed.

Central banks: Prices for longer-term Treasurys rose amid speculation that the Federal Reserve could follow through on plans to buy government debt.

The Bank of England slashed its benchmark interest rate to a record low of 0.5% from 1% and said it would buy British government bonds to expand the money supply and boost the U.K. economy.

Additionally, the European Central Bank cut its main interest rate to an all-time low of 1.5% from 2% and hinted that additional reductions may be necessary as the European economy deteriorates.

The Federal Reserve has said in recent policy statements that it would buy longer-dated Treasurys if necessary to help improve conditions in the credit market.

Supply: Investors are also gearing up for news from the Treasury Department about how much debt the government plans to auction off next week. Last week, the government auctioned off a record $93 billion in 2-, 5- and 7-year notes.

"Resistance is coming from the auction announcement," Van Order said.

The auctions come as the U.S. government is set to pay $787 billion for stimulus, $700 billion for the bank bailout and trillions more in various liquidity programs.

As the government floods the market with supply, investors worry that prices will continue to fall. At the same time, increased government spending has some analysts concerned about inflation, which erodes the value of fixed-income investments.

Treasury prices: The benchmark 10-year note was up 1-14/32 to 99-15/32 and its yield fell to 2.82% from 3.02% late Monday. Bond prices and yields move in different directions.

The 2-year note advanced 4/32 to 99-31/32 with a yield of 0.90%.

The 30-year bond jumped 3-8/32 to 100-6/32 and yielded 3.49%.

The Federal Reserve has said in recent policy statements that it could purchase longer-dated Treasurys to help improve conditions in the private credit market.

Lending rates: The 3-month Libor rate was unchanged from Wednesday at 1.28%, according to data on Bloomberg.com. The overnight Libor rate edged up to 0.32% from 0.31%.

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 key gauges reflected tighter credit. The "TED" spread widened to 1.10 percentage points from 1.02 percentage point Wednesday. The wider the TED spread, the less willing investors are to take risks.

The Libor-OIS spread held steady at 1.03 percentage point. On Tuesday, the spread was 1.02 percentage point. The wider the spread, the less cash is available for lending.