Treasury Prices Jump On Safety Buying As Stocks Slide

Treasury prices climbed Monday as stocks sunk, and after the Federal Reserve's latest purchase of Treasury securities.

Investors, unconvinced that the economic recovery will be a quick one, were sweeping up low-risk government debt as they shed stocks and other risky assets, with intermediate Treasurys gaining the most.

In recent trading, the two-year note was up 3/32 to yield 1.01% and the 10-year note was up 20/32 to yield 3.48%. Bond prices moved inversely to yields. The five-year was up 13/32 to 2.41% and the seven-year was up 16/32 to a 3.08% yield. Trade took yields back to levels that were last seen in late July.

Driving the risk averse behavior Monday, Shanghai stocks dropped 5.8%, their biggest percentage drop so far this year. Lower commodity prices, ongoing worries about tightening in bank loans and weak economic data dampened investor sentiment. China's Shanghai Composite Index posted its biggest percentage drop since November and ended at 2870.63, its first close below 3,000 since the end of June.

U.S. stocks dropped as well, with the Dow Jones Industrial Average down by nearly 2% and the S&P down by about more than 2% in recent trading.

"There's a concern that the stock market has run its course and is due for a correction now," said Rick Klingman, head of Treasurys trade at BNP Paribas in New York. "The Chinese stock market was one of the leaders on the way up; now it's being hit pretty dramatically, and that's making people concerned."

Meanwhile, on Monday, the Fed bought $7.016 billion Treasurys maturing in the next four-to-seven years in its latest operation to buy up to $300 billion Treasurys to help keep consumer borrowing rates low. The buying was the first since the Fed said at its latest policy meeting that it was going to slow the pace of its Treasury purchases and that it would probably run through the $300 billion by October.

In past operations targeting four-to-seven year Treasurys, the Fed bought an average of $7 billion to $7.5 billion. The Fed has now bought $260 billion Treasurys.

Treasury market analysts also pointed to seasonal patterns as another factor supporting bonds. For the last several years, Treasury yields have tended to drop and prices would rise over the summer and into September. In mid-June 2008, the 10-year yield was about 4.27%; by mid-September it had fallen to 3.44%. In mid-June this year, the 10-year yield hit a high of 4% compared to its recent 3.50%.

Treasurys brushed off the day's economic data, which showed conditions for New York manufacturers improved for the first time in more than a year in August. The New York's Fed's manufacturing index shot up to 12.08 this month from -0.55 in July. The indices for new orders, shipments, and employment improved as well, and future indexes conveyed optimism about the six-month outlook. link.....