Treasury prices rose broadly Friday as investors sought safety from recession fears, knocking the yield on the two-year note down for the fourth consecutive day to the lowest since early 2004.
Shorter maturity government securities have been particularly well bid, as dealers price in bets for aggressive interest rate cuts by the Federal Reserve to bolster the economy against housing market and credit market turmoil.
Estimates on Friday put the potential losses as a result of the problems plaguing lending markets anywhere from $400 billion to as much as $600 billion.
A litany of news pointed to sharp downturn in the economy on Friday which boosted Treasurys. The world's largest insurer American International Groupsuffered a record quarterly loss, the bailout plan for bond insurer Ambac Financial Groupwas reported to hit a significant snag and manufacturing growth in the Midwestcontracted.
"This is just the latest piece of evidence that the US economy is teetering on the edge of recession," said Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi UFJ in New York. "That's what's driving the rally in bonds and the selloff in stocks."
By midday in New York, two-year notes were up 6/32 in price for a yield of 1.72 percent, down from 1.82 percent late on Thursday. Earlier the 2-year's yield touched a low of 1.6876 percent.
The yield of 3-month bills dropped to the lowest in three years, at 1.88 percent, 119 basis points below 3-month LIBOR -- the most in a month. This difference between the 3-month bill yield and LIBOR with the same maturity is a key gauge of credit risk.
Benchmark 10-year note prices, which move inversely to yields, were up 22/32, yielding 3.59 percent, well off late Thursday's 3.67 percent. Just last week, the yield had peaked at 3.9620 percent, sharply up from the four-and-a-half year low of 3.2850 percent struck last month.
Economic data this week showing increasing inflation pressures and deteriorating growth have helped to push down the 10-year yield by 23 basis points, the biggest weekly decline since October.
Despite the moves on the long-maturity bonds, the spread of the 10-year yield over the 2-year yield was relatively steady around 187 basis points. Earlier this month the curve steepened to more than 190 basis points, the widest in almost four years.
Analysts expect there is scope for the curve to steepen further because of the disharmony of slowing growth at a time of rising inflation.
"The steepening is going to keep happening because we have ongoing Fed rate cuts as well as worries about inflation," said Beth Malloy, bond market analyst with Briefing.com in Chicago.
Fed chairman Ben Bernanke on Thursday did nothing to dissuade investors from expecting more rate cuts to come. He admitted that price pressures could make it harder for the Fed to ensure the economy keeps growing and that some small US banks could go under from the financial stress of housing market woes.
Fed funds futures reflect a 60 percent chance of a 75 basis point reduction in the fed funds rate in March compared with roughly 30 percent on Wednesday. Expectations of a half-percentage point cut are fully priced in.