Bonds Gain on Credit Fears; Immune to Import Data

U.S. Treasurys rose for a fourth straight day Friday, with benchmark yields at their lowest in more than two years, as investors fled to low-risk government debt after the fourth-biggest U.S. bank warned of losses.

The day's economic reports on import prices and trade balance took a backseat to ongoing worries about bank problems with their subprime exposure, traders said.

The revelation from Wachovia that it suffered an additional $1.1 billion in credit market losses last month sent U.S. equity index futures reeling, pointing to another day of stock market declines.

"The market is waiting for stocks to respond" to the latest credit news, said Thomas di Galoma, head of Treasury trading at Jefferies in New York. "I think the market is being held hostage to headline risks. It's not going to react to data like import/export prices."

The government said Friday import prices rose by a bigger-than-expected 1.8 percent in September, supporting the Federal Reserve's view on upside risks to inflation.

But the negative report on inflation was offset by another report that showed a surprise September contraction in the U.S. trade deficit. This bolstered the case that an improving trade picture could cushion the economy weakened by the housing and credit turmoil.

Traders anticipate light, choppy trading in an shortened session. The U.S. bond market will shut early at 2pm and will close on Monday for the U.S. Veterans Day holiday.

"Given the short day and the long weekend, I think the market will maintain its bid on the witch hunt for who else is going to take losses," said Sean Murphy, Treasuries trader at RBC Capital Markets in New York.

Benchmark 10-year notes were up 6/32 in price for a 4.26 percent yield, down from 4.29 percent late Thursday.

Ten-year yields dropped to as low 4.24 percent overnight, their lowest since September 2005. Prices and yields move inversely.