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Bond Market Update

Bond Market Updates and Reports at SmartMoney.com
October 03, 2008 3:57 PM

By Deborah Levine

Treasury prices tipped higher late Friday, reversing earlier losses after the House approved landmark legislation to rescue financial institutions that are saddled with bad assets

U.S. equity markets gave up their gains after the historic vote.

Two-year notes yields fell (UST2YR) 3 basis points, or 0.03%, to 1.60%, down from 2.07% last Friday. That's the biggest five-day drop since January 2001 and the sixth weekly decline.

Yields move in the opposite direction as prices.

Treasurys have rallied this week as anxious investors sought a safe haven amid doubts whether Congress would approve legislation to help rescue financial companies by enabling them to offload bad assets.

The rescue bill now goes to President Bush for his signature.

"It's a case of sell the rumor and buy the fact," said Michael Franzese, head of government bond trading at Standard Chartered "The rumor was this was the be-all, end-all and now that it's passed, people say it may not help as much or as quickly as people thought."

Yields on 10-year Treasurys (UST10Y) rose 1 basis point to 3.62%, down from 3.82% a week ago.

Treasury prices had been higher most of the day after the government said the economy shed more jobs in September than in any month since March 2003, confirmation of weakness that many anticipated in light of the recent roller-coaster ride in financial markets.

The U.S. economy lost 159,000 jobs in September. Economists surveyed by MarketWatch had forecast a drop of 110,000 in nonfarm payrolls.

Last month's unemployment rate remained at 6.1%, the Labor Department reported.

While worse then projected, the drop in payrolls -- marking the ninth straight month of declines -- had been widely expected, so many were not surprised. That may have triggered some selling due to relief it wasn't even worse.

"When you look at what happened throughout September, you couldn't have expected much hiring to occur, and the evidence was fairly overwhelming this report would be weak," said John Miller, chief investment officer for Nuveen Asset Management, which oversees more than $60 billion in fixed-income assets.

Treasurys stayed lower after a report showed activity in the services sector of the economy expanded slightly last month. Institute for Supply Management's non-manufacturing index hit 50.2 in September, compared with from 50.6 in August. A reading over 50 indicates more firms were growing than contracting.

The Federal Reserve is now fully expected to lower interest rates by the end of the month to spur economic growth, according to trading in the November federal funds futures contract. Policy-makers have their next rate-setting meeting on Oct. 29, the last scheduled session before the U.S. elections.

Traders also see a 74% chance of another cut, taking rates to 1.25%, in December.

"I expect that maybe the Fed eases one more time," said William Bellamy, who manages about $1 billion as director of fixed income at Thompson Siegel & Walmsley.

(END) Dow Jones Newswires

10-03-08 1557ET

Copyright (c) 2008 Dow Jones & Company, Inc.

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