Bonds Rally on Safe-Haven Bid as Stocks Tumble

Treasuries finished a winning week with strong gains Friday, as tumbling equities propelled investors into safe-haven U.S. government debt on the 20th anniversary of the 1987 stock market crash.

Major stock indexes fell about 2.6 percent, hurt by worries that the economy is slowing. In contrast, bond prices rallied as investors sought safety in U.S. government debt and Treasury yields, which move inversely to prices, fell. Two-year yields reached their lowest levels in two years.

For the week, two-year Treasury yields eased about 46 basis points, the biggest one-week reduction in the note since the week of the Sept. 11 attacks in 2001.

U.S. interest-rate futures, in turn, show a 96 percent perceived chance of the Federal Reserve cutting its federal funds target rate by a quarter percentage point, to 4.50 percent, at its next meeting on Oct. 30 to Oct. 31, up from around 30 percent to 40 percent implied chances earlier this week.

"Treasuries rallied as equities sold off," said John Canavan, analyst at Stone and McCarthy Research Associates, in Princeton, N.J.

That pattern could persist Monday, Canavan said, especially with the psychological aspect of viewing market action through the lens of the 20th anniversary of the 1987 stock market crash, which occurred on a Monday after a sharp sell-off Friday.

That memory could hold sway, especially when there is little else on which to focus on Monday's calendar, Canavan said. Highlights of the coming week are reports on sales of new homes and existing homes, as well as new supply coming from Treasury auctions of two- and five-year notes.

Some traders said convexity-related trades helped fuel buying of U.S. Treasuries on Friday. Convexity buying occurs when mortgage-backed portfolio managers try to raise the average duration of their portfolios by buying longer-dated securities.

Traders said a 4.40 percent yield on the 10-year note would spur convexity buying and a 4 percent yield would result in even more buying.

In late trade, benchmark 10-year yields had fallen to 4.38 percent, the lowest level since mid-September.

U.S. stocks tumbled on Friday, with the Dow Jones Industrial Average dropping 366.94 points, or 2.64 percent, on worry that economic growth would slow -- or that the economy might even contract -- after manufacturer Caterpillar cut its profit outlook.

The S&P 500 stock index is now more than 4 percent down from its record high reached last week.

Worries about the economy and the market fallout from those worries strengthened the view that the Federal Reserve would cut interest rates again at its next policy meeting.

"There seems to be a growing sentiment that the Fed [will] move at the next FOMC meeting," said David Coard, head of fixed-income sales and trading at The Williams Capital Group.