TREASURIES-Yields near historic lows after record CPI drop

Tue, Dec 16 2008, 15:45 GMT
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By Richard Leong

NEW YORK, Dec 16 (Reuters) - Long-dated Treasury debt prices rose on Tuesday with their yields hovering near historic lows after a record drop in consumer prices in November spurred expectations of deflation.

A revived appetite for stocks pared bids for cash and safe haven government bonds ahead of a widely expected interest rate cut from the Federal Open Market Committee, the Federal Reserve's rate-setting group, analysts said.

"There is some position-squaring ahead of the FOMC," said Ralph Manigat, senior bond strategist at 4Cast Ltd in New York. "This is the quiet before the storm."

Benchmark 10-year Treasury notes were up 5/32 in price for a yield of 2.50 percent after setting a fresh five-decade low of 2.47 percent earlier.

Two-year debt, which is most sensitive to the market's outlook on Fed policy, was down 1/32 in price with its yield at 0.77 percent.

The gap between two-year and 10-year yields narrowed further to 174 basis points from 177 basis points late Monday, suggesting concerns about a protracted recession and a deflation spiral.

A sharp pullback in commodity prices and consumer spending led to a record 1.7 percent drop in in the government's Consumer Price Index. For more, see

The plunge in CPI, together with a double-digit decline in housing starts last month, reinforced the view the Fed will take more aggressive measures to pull the United States out of its year-old recession, traders said.

The Fed has been widely expected to trim key short-term interest rates by at least half a percentage point from the current 1 percent. Fed policy-makers will announce their rate decision in a policy statement at around 2:15 p.m. (1915 GMT) after their scheduled two-day meeting.

"I think we're in a deflationary spiral that will probably go on until sometime next year," said Thomas di Galoma, head of U.S. Treasury trading at Jefferies & Co. in New York.

Hopes of more help from the central bank helped lift stock prices with major stock indexes climbing more than 1 percent.

But in a deteriorating economic climate, most investors scrambled for long-term assets like long maturity government bonds that provide stable income, analysts said.

As the U.S. long bond's price rose, the yield, which moves inversely to the price, briefly hit a historic low of 2.92 percent. It closed at 2.97 percent late Monday.

At the opposite end of the yield curve, Treasury bill rates traded slightly higher but still close to zero, reflecting the intense demand for cash and reluctance of banks to lend.

On the supply front, the Treasury Department will auction $25 billion in 1-month bills and $22 billion in one-year bills, a day after it sold a combined $54 billion in three-month and six-month bills.

(Additional reporting by Burton Frierson)

(Editing by Theodore d'Afflisio)

((richard.leong@thomsonreuters.com ; +1 646 223 6313; Reuters Messaging: richard.leong.reuters.com@reuters.net )) Keywords: MARKETS BONDS

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