Treasury debt prices rose in choppy trading Tuesday on renewed safe-haven bids spurred by a stock market sell-off and credit worries led by speculation of widening losses at Citigroup.
An eagerly awaited speech by Federal Reserve Chairman Ben Bernankeshed no fresh insight into the central bank's intent on future interest rate cuts, but his view of a prolonged housing slump supported the prevalent notion that the Fed would ease monetary policy further to stave off a recession.
Major stock indexes were off more than 1 percent, slammed by a sell-off in financial shares and disappointing outlookfrom computer chip maker Intel.
"Main Street and Wall Street are imploding...They are going to continue to worsen," said T.J. Marta, fixed income strategist at RBC Capital Markets in New York.
This bleak outlook, together with expectations of more Fed rate cuts, triggered a fresh wave of curve-steepening trades which involve purchases of short maturity Treasurys and sales of longer-dated issues, traders and analysts said.
The yield gap between two-year and 10-year Treasurys briefly hit 195 basis points, its widest since July 2004.
Two-year yields fell 4 basis points to 1.60 percent. The price on the two-year note, which moves inversely with yield, was up 2/32 at 100-25/32.
Ten-year yields dipped 1 basis point to 3.54 percent. The price on the 10-year note was up 3/32 at 99-21/32.
The gains in bond prices have been curbed by the perception that the market is pricey with the two-year yield near four-year lows, analysts said.
Interpreting Fed Speak
On Tuesday, Fed Chairman Bernanke, who spoke to a banking group in Orlando, Fla., said mortgage delinquencies and foreclosures will likely grow along with further declines in home prices.
In addition to Bernanke, several other Fed officials were slated to make public appearances Tuesday.
Fed Vice Chairman Donald Kohn said before a Senate panel that U.S. banks face difficulties from the current housing slump but mortgage-related write-downs and losses would not threaten the overall banking system.
Later, Fed Governor Frederic Mishkin will offer his economic outlook and Dallas Fed President Richard Fisher will speak about balancing inflation and growth.
Some analysts see the Fed in a tough spot, given the near-term threat of a recession and prospects of inflation rising in the long run.
But the prevalent market view is that the Fed will choose to ease aggressively in the coming months to bolster a weakening consumer sector and an ailing financial industry due to the subprime mess.
According to interest rate futures, traders are putting chances at 72 percent that the Fed will lower the federal funds target rate by 0.75 percentage point this month. The Fed's current target on the overnight cost of surplus reserves between banks is 3.00 percent.
Citigroup's stock was down 7 percentafter a prominent Middle East investor said Citigroup needs more capital and Merrill Lynch estimated wider losses for the largest U.S. bank.
Meanwhile, U.S. chain store sales fell 0.6 percent in the week ended March 1, compared with a 0.5 percent gain the prior week, according to the International Council of Shopping Centers and UBS Securities. Redbook Research reported February month-to-date store sales were down 1.3 percent compared with the same period in January.