Treasurys Rally as Financial Rescue Plan Disappoints

U.S. Treasurys rallied Tuesday as market disappointment over a government plan to rescue the ailing financial system sent investors rushing into safe-haven debt.

Government bonds soared after the U.S. Treasury unveiled a revamped financial rescue plan to cleanse $500 billion in spoiled assets from banks' books and support $1 trillion in new lending through an expanded Federal Reserve program.

Analysts said they were disappointed that the package appeared thin on details, particularly in its focus on a partnership between the public and private sectors to rid the banks of billions of dollars worth of bad assets.

Getting rid of bad assets has been the government's aim since the previous administration introduced the much-maligned Troubled Asset Relief Program last fall, and analysts say they have yet to see how this will be done.

"It sounds like for this public-private investment fund they are still exploring a range of different structures for the program or seeking input from market participants,'' said Carl Lantz, U.S. interest rate strategist at Credit Suisse in New York.

"That's the the kind of stuff we heard on TARP One and suggests that given all this time they still don't have anything very specific nailed down. I think that's going to be a disappointment for risky assets and it's good for the bond market.''

Benchmark 10-year Treasury notes were trading 1-12/32 higher in price for a yield of 2.83 percent, from 2.99 percent late Monday, while the 30-year bond traded 2-4/32 higher in price for a yield of 3.54 percent from 3.65 percent.

Holding Up

Treasurys held up well under the weight of $32 billion worth of three-year notes that hit the market. Dealers said the auction went well and attracted strong demand.

The U.S. Senate voted to pass an $838 billion economic rescue plan, setting the stage for tough negotiations over the final size and scope of spending and tax cuts aimed at reversing the deep recession.

Given the excitement over the Treasury's plan, markets showed surprisingly little reaction to comments from Federal Reserve Chairman Ben Bernanke, who would normally be a top focus of financial market traders.

In testimony to the House of Representatives Financial Services Committee, Bernanke said the Fed believed an array of extraordinary programs aimed at stabilizing credit and banking have improved market conditions and eased strains despite a drumbeat of negative economic news.

After President Barack Obama made his case to the country on Monday for the stimulus, markets had high hopes that Treasury Secretary Timothy Geithner would follow up with a strong financial rescue plan.

Among other elements, the plan will devote $50 billion to try to stem home foreclosures. But analysts said overall it was not specific enough.

"Treasurys have done quite well on the assumption that we are ... keeping these zombie banks alive,'' said Charlie Smith, chief investment officer of Fort Pitt Capital Group in Greentree, Pennsylvania. "The fact that we don't have a fully baked plan I think is disturbing some people.''

One issue potentially capping Treasurys' gains had been the auction of 3-year notes, which is part of the Treasury's record-large $67 billion February debt refunding this week.

The auction will be followed by the sale of $21 billion of 10-year notes Wednesday and $14 billion of 30-year notes Thursday.

Two-year Treasury notes were trading up 5/32 in price for a yield of 0.93 percent, while five-year notes were 26/32 higher for a yield of 1.80 percent.

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