U.S. Treasury debt prices rallied Friday as higher oil prices, weaker stocks and worries about the health of the financial sector drove a bid for safe-haven government debt.
NYMEX crude oil prices rose after The New York Times cited U.S. officials saying that Israel had carried out a large military exercise this month that looked like a rehearsal for a potential attack on Iran's nuclear facilities.
Also, investors in the stock market demonstrated new concerns about the outlook for the U.S. financial industry and the impact of higher oil prices on consumer spending and inflation. Major stock indexes each fell more than 1 percent.
"There's a lot of fear back in the market coming from several fronts," said Josh Stiles, senior bond strategist at IDEAglobal in New York.
Bonds were already focusing on two- and five-year Treasury note auctions and a Federal Reserve policy meeting next week.
"There was already worry about upcoming supply because the two-year notes will be auctioned a day before the Fed's policy statement and the five-year notes will be sold the day after the statement, so that makes the pricing tricky," Stiles said.
Besides those concerns, bonds are reacting to "cracks in the stock market, banks being under pressure, and oil and Middle East fears," he said.
Talk of a possible profit warning by Merrill Lynchand drops in shares of MBIAand Ambac Financialafter ratings agency Moody's Investors Service stripped the company's insurance arm of its top-notch "Aaa" ratings late on Thursday added to worries about the health of the financial services sector and fed the safety bid for U.S. government debt. A Merrill Lynch spokeswoman declined to comment on the rumors.
"The Treasury market gains go back to oil prices rising and knocking the stock market down and the dollar weakening." said Pierre Ellis, senior economist at Decision Economics in New York, "Fixed-income assets become more attractive when equities become less attractive."
"For the rest of the day, the focus will be on energy and what happens to some of these bank stocks that have been so beaten up after the MBIA and Ambac downgrades," said Credit Suisse U.S. interest rate strategist Carl Lantz in New York.
U.S. crude oil futures were up $2.70 to $134.63 a barrel.
Crude producers and consumers will confer in Riyadh on June 22. Crude oil prices have more than doubled in a year to nearly $140 a barrel, an almost sevenfold rise since 2002.
Higher oil prices are a negative for the U.S. economy, absorbing consumers' spending power, and from that point of view are positive for bond prices.
In midday trade, benchmark 10-year Treasury notes were up 16/32, nearly erasing the previous day's losses. Their yields, which move inversely to prices, eased to 4.14 percent from 4.22 percent on Thursday.
Two-year Treasury notes rose 4/32, not as much as they lost on Thursday. Their yields eased to 2.88 percent from 2.85 percent on Thursday.