Bond Yields Hit 2-Year Low on Credit Losses

Treasuries surged higher Thursday, pushing yields to their lowest in more than two years, as fresh news of credit losses and subdued economic data increased the attraction of safe-haven government bonds.

A relatively tame score on underlying inflation last month and surprisingly large number of claims for jobless benefits in the latest week left investors thinking the Fed would have more leeway to reduce borrowing costs to shore up the economy.

Regional factory surveys showed surprising strength in some cases but the details of the reports suggested underlying weakness and reasons for concern.

Barclays, Britain's third-biggest bank, announced a 1.3 billion pound ($2.7 billion) writedown for losses linked to the U.S. subprime mortgage housing crisis.

The red ink refocused investors on the troubled financial sector while a rise in key short-term lending rates in the dollar and other major currencies added to signs of distress in the credit markets.

"The overnight disclosures on Barclays about subprime losses brought that back to the forefront of people's thoughts and the flight to quality has been resumed," said James Capra, President of Capra Asset Management in Rye, N.Y.

Benchmark 10-year notes gained 22/32 on the day, pushing yields down to 4.17 percent from 4.25 percent on Wednesday. During the session, 10-year yields fell to their lowest since late 2005.

Two-year notes, which benefit from heightened rate cut expectations and also from safe-haven flows, rallied 9/32 in price to yield 3.35 percent. During the session, two-year yields fell to their lowest since early 2005.

The rally also took long bonds up more than a full point on the day. Thirty-year bonds were last up 1-1/32, yielding 4.54 percent.