Bonds Gain as AIG Renews Fears Over Credit

Treasury debt prices rose as renewed credit worries kindled demand for low-risk investments, sending benchmark 10-year notes to their best week in nearly two months.

Bonds climbed following news that American International Group, the world's largest insurer, recorded a record $7.8 billion quarterly loss.

"We saw some pretty good buying ... on safe-haven demand on renewed concerns on credit issues with AIG's losses," said Kim Rupert, managing director of global fixed-income analysis with Action Economics LLC in San Francisco.

The dismal AIG results fanned doubts about a recovery in credit markets. Other financial companies including Swiss bank UBS and home-finance company Fannie Mae have announced this week a fresh wave of asset write-downs and credit losses stemming from subprime mortgages.

Credit fears have dragged equity markets from their recent peak, and benchmark 10-year Treasury yields from their four-month high set earlier this week.

Ten-year note's yield, which moves inversely to its price, last traded at 3.75 percent, down from 3.78 percent late Thursday. It briefly moved above 3.95 percent just two days ago.

Major US stock indexes were down as much as 0.8 percent following a 2 percent drop in Tokyo and a 1 percent fall in Europe.

Another positive factor for Treasurys was the roughly $70 billion investors received on maturing government bonds from the Treasury quarterly refunding this week.

Investors plowed back some of this record amount of cash into Treasurys in anticipation of seasonally strong performance after the May refunding, analysts said.

Bonds' gains were mitigated by a bigger-than-expected narrowing in the March trade deficit, boosting the prospects of an upward government revision on first-quarter gross domestic product, analysts said.

A stronger first-quarter GDP reading will support the view that the US economy would avoid a recession and alleviate pressure on the Federal Reserve to trim short-term interest rates further, analysts said.

The Treasurys market also traded off its initial highs on some reassuring comments from Citigroup's new chief executive, Vikram Pandit, after the largest US bank unveiled a plan to sell $400 billion of assets in a bid to become more efficient and profitable.

Citi has suffered hefty losses from the subprime crisis and its fallout.

"Pandit is selling his program well. People are a little less fearful and they are taking some profits on bonds," said Andrew Brenner, senior vice president at MF Global in New York, said of the Citi's CEO remarks in conference call with analysts and investors.

Still, there are plenty of downside risks to the economy, including persistent bottlenecks in the credit markets and a relentless surge in oil which hit a series of record highs this week. US light, sweet crude broke above $126 a barrel Friday.

Among other cash maturities, two-year notes were up 2/32 in price for a 2.20 percent yield, down from 2.23 percent late Thursday. Two-year yield fell for a fifth straight session and poised for its biggest weekly drop since March.

Five-year debt was up 4/32 in price for a 2.95 percent yield, down from 2.98 percent late Thursday.

Thirty-year bonds, after Thursday's well-bid reopening, traded up 20/32 for a yield of 4.51 percent versus 4.55 percent late Thursday.

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