U.S. government bonds edged higher Monday as investors bet a banking sector crisis would keep the Federal Reserve cutting interest rates despite signs of strength in the economy.
Treasury yields held near two-year lows despite a surprising rise in The Institute for Supply Management's non-manufacturing index for October, which signaled tighter credit conditions have yet to compromise economic growth.
Still, the resignation of Citigroup CEO Charles Prince over the weekend, coupled with the announcement of up to $11 billion in debt write-downs by the bank, stoked anxiety about the possibility of further losses.
As dealers speculated that the Fed's pre-emptive rate cuts to date may not have been enough to ward off a wider downturn, they nudged two-year notes 1/32 higher in price for a yield of 3.65 percent. Bond yields and prices move inversely.
"The market at this time isn't trading on economic data," said Jane Caron, chief economic strategist at Dwight Asset Management, in Burlington, Vermont. "It's trading on what's happening in financial markets and whether or not the subprime (mortgage-)initiated credit crunch is about to take a turn for the worse."
The market came off its highs after Fed Governor Frederic Mishkin suggested the central bank might unwind its recent interest-rate cuts if they proved excessive.
Yet the way things were looking at the moment, dealers were guessing the Fed's 3/4-percentage-point monetary easing was, if anything, not enough to stave off the credit crunch.
"The mood in risk assets remains somber," said Lena Komileva, economist at Tullett Prebon, in London. "The market continues to price in more bad news about the health of the global financial infrastructure."
Benchmark 10-year note yields eased 1 basis point to 4.31 percent.
In a testament to the overwhelming boost to bonds from the credit crisis, Treasuries have marched higher even after last week's surprisingly strong employment report.
The same was true on Monday. The ISM's services index rose to 55.8, well above forecasts, and yet the market paid the figures little mind.