U.S. Treasury debt erased losses Wednesday, after rating agency Moody's said risks were rising that bond insurer MBIA and others in the industry would run into financial trouble.
Bonds had spent much of the session in negative territory as a November burst in private-sector hiring was seen as lessening the chances of an aggressive interest rate cut from the Federal reserve.
But in a nagging reminder of a crisis that has gripped financial markets since summer, Moody's said the credit crunch had raised the risk MBIA would suffer a capital shortfall.
"It's just a little reminder that there are more problems out there in terms of losses and write-downs," said Rick Klingman, managing director of Treasury trading at BNP Paribas.
"Market psychology turns on a dime."
And turn it did. Having traded heavily in the red, benchmark 10-year notes almost completely unwound the decline, leaving them down 1/32 and yielding 3.90 percent.
The comeback came despite a solid rally in stocks that had all major indexes up well over 1 percent.
As the credit squeeze intensifies, investors have worried bond insurers might not have enough money to cover the trillions of dollars in debt they have guaranteed against default. The Moody's report seemed to reaffirm those fears. Two-year notes benefited, and were off marginally in price and offering a yield of 2.91 percent.
Earlier, a report from ADP showed a gain of 189,000 private sector jobs, nearly four times above forecasts, knocking bonds lower. Forecasters had been wagering on a gain of around 75,000 in the government's official upcoming tally of employment, due out Friday, but many were now revising their estimates higher.
Revisions to third-quarter productivity data were actually supportive of government debt, but seemed too backward-looking to matter at this point.
Nonetheless, inflation hawks took comfort that a robust 6.3 percent annualized jump in productivity had pushed labor costs, perceived as an leading indicator of rising prices, down 2 percent.
A separate report showed some deterioration in service sector growth, though not enough to sway the market in either direction.