Short-term Bonds Gain as Stimulus Plan Panned

Short-dated U.S. government bonds rose Friday as stocks turned negative on investor fears a White House stimulus package might not keep the economy from sliding into recession.

President Bush called for an economic stimulus package of around $140 billion. For plunging equity markets, that was not enough, and they reacted by capping a brutal week with yet another bout of selling.

This allowed two-year notes to climb as much as 4/32 in price, pushing its yield to a new three-year low of 2.33 percent.

"It is probably going to be too little and too late," said Mary Ann Hurley, vice president of fixed-income trading at D.A. Davidson & Co. in Seattle, of the joint initiative between Bush and Congress.

Data on consumer sentiment showed a modest uptick, but to levels that were still consistent with a sharp slowing in the economy.

The focus for financial markets was on beleaguered stocks, with the S&P 500 down over 5 percent this week, and on track for its worst weekly performance in 5-1/2 years. The index was down 0.86 percent on Friday alone.

Longer-dated bonds sold off a bit on profit-taking, however, with 30-year notes down 14/32 and yielding 4.32 percent, up two basis points.

An index of leading indicators fell 0.2 percent, more than expected and consistent with other figures pointing to a notable retrenchment in economic activity.

This trend has fueled a six-month tear in the bond market as investors price in both a recession and aggressive interest rate cutting by the Federal Reserve.

The markets are now looking for at least a half percentage point easing at the Fed's late January meeting, which would bring the fed funds rate to 3.75 percent.