Bonds Recover to Trade Flat as Stocks Slip

Treasurys traded flat Friday, recovering their earlier losses as stocks turned lower and restored the safe haven bid for U.S. government debt.

Yields traded near 2-year lows on the back of credit market worries about banks' write-downs from investments in riskier assets.

The benchmark 10-year note's price traded flat for a yield of 4.14 percent, up from an earlier two-year low near 4.13 percent. Bond yields and prices move inversely.

"Stocks are making the lows on the day right now. Fannie Mae is getting hit which is probably hurting the financials," said John Spinello, Treasury startegist at Jefferies.

Fannie Mae shares plunged 10 percent to their lowest level in more than a decade on Friday, after the company completed a conference call with investors to discuss accounting matters. With Friday's drop, the stock has lost more than 20 percent of its value this week.

The Dow Jones Industrial Average slipped 0.1 percent to 13,098 points.

Earlier, Federal Reserve officials' hints that the U.S. central bank might be less likely to cut interest rates next month than bond investors had previously thought had pushed Treasury prices lower.

But the performance of other assets held sway soon after the Fed officials' comments and early morning data releases.

"With the data noise out of the way, we are now correlating with the moves in riskier assets," said George Goncalves, Treasury strategist at Morgan Stanley in New York.

The two-year Treasury note traded unchanged in price for a yield of 3.31 percent versus 3.32 percent late Thursday.

Earlier, Treasurys briefly extended losses after Fed Governor Randall Kroszner said the current stance of monetary policy was appropriate and should get the economy through a rough patch next year.

St. Louis Fed President William Poole, a voting member of the central bank's policy-setting committee, said changes in that stance depend on the arrival of new information.

U.S. short-term interest rate futures briefly slipped to show a 78 percent perceived chance the Fed will cut benchmark rates next month, down from 94 percent late on Thursday.

U.S. Treasury Department data on capital flows showed net foreign purchases of U.S. Treasury bonds and notes rose to $26.25 billion in September, rebounding from sales of $2.76 billion in August.

"The TICS data showing net foreign buying of Treasurys is positive, though the market is a little skeptical about these numbers because they are old," said Beth Malloy, bond market analyst with research company in Chicago.

Other government data showed U.S. October industrial output unexpectedly fell 0.5 percent, pointing to a weaker economic backdrop and lending some support to Treasurys.

"It was a broad-based drop in manufacturing activity," said Michael Moran, chief economist at Daiwa Securities America in New York. "If you look at the past several months, we're down on balance in the manufacturing sector so we're seeing some soft numbers in this area of the economy."