U.S. Treasury debt prices fell Friday as stocks rallied on a White House plan to rescue homeowners caught in the subprime mortgage debacle, taking the recent safe-haven bid out of government bonds.
Federal Reserve Chairman Ben Bernanke also reassured investors worried about sclerotic credit markets, saying the central bank would act as needed to limit the adverse effects on the economy.
President Bush proposed reforms intended to help homeowners with risky subprime mortgages keep their homes, though he warned that the government would not bail out speculators.
"It's inspiring a little bit of confidence in the markets, which is helping credit spreads and equities a little bit, taking some of the flight bid out of the Treasury market," said Bill Hornbarger, chief fixed-income strategist at A.G. Edwards & Sons in St. Louis.
However, trade was constrained somewhat by an early market closing. The Securities Industry and Financial Markets Association recommended a close at 2 p.m. ahead of Mondays Labor Day holiday.
The benchmark 10-year U.S. Treasury note lost 5/32 in price for a yield of 4.53 percent, versus 4.51 percent late Thursday.
The two-year note fell 2/32 on the day, yielding 4.14 percent. Five-year notes tumbled 6/32, pushing yields up to 4.25 percent.
But the 30-year bond managed to hold steady for a yield of 4.83 percent, as month-end demand offset some of the stock market strength.
"Stocks are still doing alright but the month-end gave us a little bid," said Ian Lyngen, interest rate strategist at RBS Greenwich Capital in Greenwich, Connecticut.
"People are still worried about when and if and how much the Fed will have to ease. People are a bit fatigued after this month so people are just waiting to go home for the long weekend."
Big Month for Two's
The most sensitive to changing views on Fed policy, two-year debt was still on track for its biggest monthly rally since 2003, boosted by the view that the increasingly difficult financing conditions faced by firms could eventually prompt rate cuts.
The White House's mortgage proposal was seen by investors as possibly staving off a more pronounced U.S. economic slowdown and reversed the recent flight to safety into government debt, with investors turning instead to riskier assets like stocks.
"In terms of the president's proposals, they are really aimed at helping out the victims of some of the mortgage abuses, while not providing any relief at all of substance to the perpetuators of the problem," said Mark Vitner, economist at Wachovia Securities in Charlotte, North Carolina.
Economic data released Friday showed inflation under control in July. This would give the Fed more leeway to cut rates if needed, though some analysts did not see a strong hint of monetary easing in Bernanke's speech.
"The only thing I saw that was really new was that the financial losses exceed the most pessimistic forecasts, but then he goes on to say that it is not the Fed's responsibility to protect investors," said Richard Gilhooly, fixed-income market strategist at BNP Paribas in New York.
"He confirms what we suspected, that there is no Bernanke put and that means no rate cut."
U.S. factories were busier than forecast in July, suggesting a resilient economy that might not need an interest-rate cut to overcome recent financial markets volatility.