U.S. Treasurys rallied strongly Wednesday as falling stocks, a plunging dollar and record high oil prices spooked investors and sent them scurrying into safe-haven government bonds.
The toxic mix of factors indicated the economy might need another dose of interest rate cuts, and data showing strong worker productivity suggested the Federal Reserve had the leeway to ease monetary policy without sparking inflation.
The dour sentiment in other markets boosted the allure of low-risk bonds, helping an auction of benchmark 10-year noteseven though investors fretted over suggestions that key buyer China might reduce its holdings of U.S. government debt.
"The market took it pretty well. It was a fair auction, nothing special, nothing horrible," said Rick Klingman, managing director of U.S. Treasury trading at BNP Paribas in New York. "We're back to watching stocks."
Two-year notes, which gain when investors put on bets for Fed rate cuts and also on safe-haven flows, surged 7/32, pushing yields down to 3.60 percent.
Prices on 10-year notes rose 9/32 for a yield of 4.35 percent.
Analysts said the dollar's weakness would probably be bad news for Treasuries in the long run by spurring inflation and scaring foreign investors away from the market.
This explained a general preference for short-dated maturities. The trend further steepened the yield curve, driving the spread between 10- and two-year notes out to 75 basis points, the widest in more than two years.
"The curve is continuing to steepen with all the uncertainties out there," said Klingman.