Bond Prices Rally on Stock Market Drop

U.S. Treasury prices rallied Wednesday, as fresh stock market losses spurred demand for the relative safety of U.S. government debt.

Two-year note yields momentarily moved below 3 percent for the first time since 2004 as credit worries again slammed financial shares and the rest of the stock market.

The two-year yield ended the holiday-shortened trading session at 3.01 percent, down 18 basis points on the day, however. It rose 11/32 in price. Bond prices and yields move inversely.

Credit jitters and oil nearing $100 per barrel fueled safe-haven bids and bolstered expectations of a Federal Reserve interest rate cut, contributing to a yield curve steepening.

The spread between two- and 10-year yields widened to about 100 basis points, the biggest gap since January 2005.

In afternoon trade, the Dow Jones, S&P 500 and Nasdaq stock indexes were all lower, but had cut their steepest losses. Earlier, the Standard & Poor's 500 index briefly slipped into negative territory on the year.

Oil backed off from levels nearing $100 per barrel, but high energy prices still fueled recession fears.

"The markets are worried about the economy slowing down too much," said Josh Stiles, senior bond strategist at "We're used to an environment where everything is 'just right' with growth steady and inflation low. But the market action tells you what the Fed is saying: that they're seeing risks on both fronts -- growth and inflation."

Stocks incurred additional losses and Treasuries made further headway at midmorning following news that U.S. consumer sentiment was at its lowest level in two years in November. The Reuters/University of Michigan Surveys of Consumers said its final November figure on consumer sentiment was 76.1, above the median forecast in a Reuters poll of 75.0 but below 80.9 in October.

At 2pm ET, when the market closed for the Thanksgiving Day holiday, the benchmark 10-year note yielded 4.01 percent. Earlier, it had dipped below 4 percent for the first time since September 2005.

"The market [traded] on emotions," said George Adell, fixed-income strategist at Commerce Capital Market in Jupiter, Fla. "No one knows when this credit and housing [correction] will bottom."

The U.S. bond market will be closed Thursday for the U.S. Thanksgiving holiday. It will also close early at 2pm ET Friday.

The government's report on new jobless claims had little impact on bond prices. Initial claims for unemployment benefits totaled 330,000 last week, matching economists' consensus forecast and lower than the prior week's upwardly revised 341,000, the Labor Department said.