Treasurys Rally Anew on Credit Worries

NEW YORK (AP) -- Treasurys rallied sharply Monday, sending the 10-year note closer to the closely watched 4 percent level amid worries that the capital markets will suffer a new bout of serious mortgage-related problems.

The latest subprime conerns once more caused investors to seek the safety of government-backed bonds and eschew stocks.

Goldman Sachs Group Inc. Monday placed Citigroup Inc. on its "sell" list, and predicted the bank may have to write off $15 billion more in bad assets backed by poor-quality mortgages. In addition, Swiss Re, the world' largest seller of backup insurance to other insurers, reported an $878 million loss related to subprime home loan contagion.

The news set off heavy selling of bank and other stocks in Europe and on Wall Street, where the Dow Jones industrial average traded down as much as about 215 points. It also created demand for Treasurys and German government bonds, which also are perceived as being among the world's safest assets.

The upcoming holiday season did not lighten the mood of investors, although the season between Thursday's Thanksgiving holiday and New Year's Eve often sparks a lively rally for stocks.

"There is a feeling of 'who cares about Thanksgiving this time?'" said T.J. Marta, fixed-income analyst at RBC Capital Markets. "The market has too much to get through this week."

The benchmark 10-year Treasury note rose 27/32 to 101 13/32 with a yield of 4.08 percent, down from 4.18 percent late Friday. The benchmark yield has not been below 4.1 percent since early September, 2005.

The 30-year long bond rallied 1 40/32 to 108 17/32 with a yield of 4.48 percent, down from 4.54 percent late Friday.

The 2-year note advanced 11/32 to 100 26/32 with a 3.20 percent yield, down from 3.35 percent late Friday.

Continued selling in after-hours trade sent some yields still lower. The benchmark 10-year Treasury yield fell to 4.07 percent at 5:30 p.m. Eastern time from 4.08 percent at the 3 p.m. close, while the 30-year yield remained at 4.48 percent. The 2-year yield dropped to 3.16 percent from 3.20 percent.

The 3-month yield rose to 3.39 percent from 3.38 percent on Friday as the discount rate edged up to 3.31 percent from 3.30 percent.

Traders are bracing themselves for aggressive efforts by banks this week and next to unload mortgage-backed securities ahead of the Nov. 30 end of the fiscal year for some major institutions, according to Marta. It is common practice for banks and other financial institutions to rearrange their balance sheets and get rid of some assets at the end of a fiscal year.

Not all mortgage-backed securities are backed by loans made to persons with bad credit, but ever since August investors have been wary of any debt that could be risky. This means that getting rid of these assets may be a tough sell for the banks.

A new forecast from the National Association for Business Economists found that the risk of recession has increased. The group predicts gross domestic product, or the economy's growth rate, will rise at an annual rate of just 1.5 percent in the fourth-quarter, down from 3.9 percent in the third quarter.

A country is not in recession until it has two consecutive quarters of economic shrinkage. Still, the new report makes clear how much the country has been hurt by severe problems in the housing and credit markets.

Many investors are hopeful this sort of forecast will help convince the Federal Reserve to continue cutting rates to prop up the economy. The central bank cut rates by a total of 0.75 percentage points in September and October and its officials have tried to signal that more reductions may not be forthcoming.

The economic and housing concerns were underpinned by an announcement from The National Association of Home Builders that its housing market index held steady at a record low 19 in November. Readings below 50 indicate that more builders rate business conditions as poor rather than good.