Treasurys Flat as Economic Gloom Prevails

U.S. Treasury debt prices finished little changed Friday as higher stocks overshadowed more evidence of deepening economic gloom.

Chilling U.S. data showed consumers cut monthly spending for the first time in two years during September as a slumping jobs market and tightening credit conditions forced a record drop in sentiment.

"The data that we had today was appalling ... but there has been a bit of a tug-of-war with stocks," said Dominic Konstam, head of interest-rate strategy at Credit Suisse in New York.

The 10-year Treasury note traded flat in price for a yield of 3.97 percent.

However, the benchmark note's yield, which moves inversely to price, posted its biggest weekly rise since June.

While stocks overall had their worst month in a decade in October, they did have a strong week, and sapped any safety bid for lower-risk debt.

The 2-year Treasury note traded unchanged in price for a yield of 1.56 percent.

The Commerce Department said Friday that spending shrank by 0.3 percent in September, while another report showed business activity in the U.S. Midwest contracted in October at a much more rapid rate than expected.

A survey released Friday also showed U.S. consumer confidence suffered its steepest monthly drop on record in October as the worst financial crisis in generations continued to take its toll.

"Things are pretty severe. They are only going to get more severe," said Thomas di Galoma, head of U.S. Treasury trading at Jefferies & Co in New York.

"Even though there is going to be a tremendous amount of supply and sort of a crowding out effect, at the end of the day Treasurys at these types of yield levels especially in the long end of the market, with no inflation, seem to be a pretty decent buy," Galoma said.

Month-end rebalancing of portfolios made for unpredictable shifts between risky assets such as stocks and safer assets such as government bonds.

"We are seeing all this up and down rotation in equity markets and in bond markets as well," said Joe Keetle, senior wealth manager at Dawson Wealth Management in Cleveland, Ohio.

A Japanese interest rate cut Friday did nothing to dispel fears of a long and deep global recession.

The Bank of Japan's first dose of monetary easing in seven years, aimed at shoring up confidence, only highlighted the effects of the worst financial crisis in 80 years and put a bit of a floor under government bond prices.

Still, the 30-year Treasury bond fell 18/32 in price Friday for a yield of 4.37 percent from 4.34 percent late Thursday.

Ultimately this is putting downward pressure on inflation, which is good for bonds and was also reflected in the morning's data. Plus, there is more unpleasant economic data to come.

"We still have to work through what will probably be some ugly employment numbers," said Michael Strauss, chief economist and market strategist at Commonfund in Wilton, Connecticut.

"Because of the economy's weakness, and the recession that is also unfolding in Europe and the massive slowdown that is unfolding in emerging markets, we have a dramatic change in the inflation picture and that dramatic change is significantly lower inflation,"  he said.

The government's monthly employment report is due next Friday.

Copyright 2008 Reuters. Click for restrictions.