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Bonds Advance on Hedge Fund Rumors

Treasury prices threw off early weakness and advanced Friday after a rumor that another hedge fund is in financial trouble circulated through trading rooms.

"There are a number of names of hedge funds being bandied about as possibly being in trouble," said Tom di Galoma, head of Treasurys trading at Jefferies & Co. It is impossible to discern whether the stories have any basis in fact, he said.

Problems at hedge funds in recent months have contributed to the massive declines on Wall Street, and in turn benefited the government bond market. Problems at two funds operated by Bear, Stearns & Co. last fall brought home to the markets the reality that the housing and mortgage crisis was spreading throughout the financial sector.

Although the rumor was not verified, it affected the markets, sending the major stock indexes well below their best levels and pushing Treasurys higher. Worries about weakness at financial institutions tend to spark demand for Treasurys, which carry government backing and are largely shielded from the risks of some other asset classes.

The benchmark 10-year Treasury note gained 9/32 to 104 27/32 with a yield of 3.66 percent, down from 3.71 percent in late trade Thursday. Prices and yields move in opposite directions.

The 30-year long bond advanced 18/32 to 110 27/32 with a yield of 4.34 percent, down from 4.37 percent late Thursday.

The 2-year note rose 1/32 to 101 28/32 with a yield of 2.26 percent, down from 2.32 percent late Thursday.

During most of January the stock market was slammed by storms of selling as investors reacted negatively to dismal earnings from major banks and shakiness in the credit markets and overall economy. The aversion to the risks of financial and other stocks created heavy demand for Treasurys, which carry government backing.

Yet investor sentiment may have shifted this week, following a large Federal Reserve rate reduction and an economic stimulus plan agreement between the Bush administration and congressional leaders. Investors since Wednesday have been more interested in the bargains in the stock market than fearful of its risks.

"There does seem to be some calm re-entering the markets and the Fed is pledged to keep rates low."

The Federal Reserve will hold a monetary policy meeting on Tuesday and Wednesday. Many investors expect the Fed to follow up on this week's sizable 0.75 percentage point rate reduction with a 0.50 percentage point cut that would drive the overnight Fed funds rate charged to commercial banks down to 3 percent.

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