U.S. Treasurys rallied Wednesday as stock losses, higher crude oil prices and rumored investment banking losses spurred a bid for safe-haven government debt after a two-day retreat.
Meanwhile, prospects for Federal Reserve rate hikes this year dwindled, but fed funds futures contracts still reflected expectations for a 25-basis-point increase by October.
Equity losses were particularly pronounced in the financial sector where the S&P 500 financial index briefly hit a five-year low on rumored Goldman Sachs write-downs. Goldman said that it does not comment on market rumors.
The battering that Treasurys took early in the week, one that pushed two-year yields (which move inversely to prices) up to their highest level since January, put them at levels attractive enough to draw buyers, analysts said.
James Caron, head of global rates research at Morgan Stanley, said the unwarranted pricing in of Fed rate hikes this year had left two-year Treasury note yields "very, very cheap" relative to where Fed monetary policy is actually headed.
"The Fed will stay on hold (until 2009) and, therefore, I would buy two-years here," he told reporters at the Reuters Investment Outlook Summit in New York on Tuesday.
After a two-day sell-off, Treasurys were technically oversold and due for some rebound, said William Sullivan, chief economist at JVB Financial Group in Boca Raton, Fla.
"The combination of the oversold condition, the weakness in equities, the run-up in energy prices, and rumors - even if they're false - created a mini-flight-to-quality," he said.
Two-year notes rose 8/32 in price as their yield eased to 2.79 percent from 2.93 percent late on Tuesday.