Two-Year Note Gains as Yield Curve Hits 4-Year High

Short-dated Treasury bond prices pared losses and briefly turned positive after the Federal Reserve cut interest rates by 50 basis points, while longer-dated bonds extended losses in an inverse move to higher stocks.

The Treasury yield curve went to its steepest since late 2004, with the spread between the yield on 2-year notes and 10-year notes moving to 144 basis points.

The benchmark 10-year note was trading 14/32 lower in price for a yield of 3.73 percent from 3.68 percent late Tuesday, while the two-year note was flat in price for a yield of 2.30 percent.

Other economic news signals of the day were very mixed.

Economic growth essentially ground to a halt in the fourth quarter, with gross domestic product up just 0.6 percent. For 2007 as a whole, growth was its weakest in five years.

However, ADP said in another report that 130,000 new private-sector jobs were created in January, nearly three times forecasts and painting a much brighter picture than bonds had been priced for.

Complicating things further, inflation outside food and energy spiked well above the central bank's comfort range in the fourth quarter.

Still, continued pain in the financial sector meant a safe-haven bid for bonds is never too far.

Fresh write-offs at big European and Japanese banks on Wednesday drove investors' attention firmly back to the credit crunch after days gazing at Societe Generale's stunning losses, which it has blamed on a junior trader.

Swiss bank UBS unveiled $4 billion in new write-downs tied to the U.S. subprime mortgage meltdown, while newspaper reports said subprime losses at Japan's Mizuho Financial Group Inc may have ballooned to as much as $2.8 billion.

Outside the business sector, consumers also seemed to be having a hard time. A weekly reading of consumer confidence published late on Tuesday by ABC News and the Washington Post dropped four points to -27, its lowest level in nearly five years.