U.S. Treasury debt prices climbed Friday after J.P. Morgan Chase and the New York Federal Reserve said they would be providing emergency funds for a troubled Bear Stearns.
The bank has been a central figure in the credit crisis since two hedge funds it operated collapsed last June, and rumors swirled earlier this week that it was strapped for cash.
The latest developments provided an added boost to government bonds, which had already been rallying on a more generalized angst about the credit markets, and on news that inflation pressures had receded somewhat in February.
Signs of trouble emerged at home and abroad, with German state-backed lender LBBW taking a $1.7 billion hit on its structured investments.
Unsettled investors piled into the relative safety of Treasuries as the stock market took a spill out of the gates.
Benchmark 10-year notes rose 25/32 in price and were offering a yield of 3.43 percent, down ten basis points.
"This is not good," said Mehernosh Engineer, credit strategist at BNP Paribas. "It seems all the counterparties to Bear may have pulled all the liquidity and therefore they were forced to the Fed."
As fear grew about what other nasty surprises might be in store, two-year notes surged 10/32 for a yield of 1.46 percent, down 16 basis points. At its deepest, the sell-off took the yield to 1.38 percent, its lowest since mid-2003.
The rush to safety had also pushed Treasury bill yields down to levels not seen since summer 2004.
Reinforcing the bond market rally, fears of rampant inflation now appeared premature. Consumer prices rose 4 percent on the year to February, down from 4.3 percent in January.
Costs outside food and energy were steady on the month, and rose 2.3 percent year-on-year, also lower than the previous month's reading. While this was still above the central bank's presumed comfort range, officials have indicated the credit crisis has generated extraordinary circumstances.
In addition to a series of rate cuts that have brought the federal funds rate down to 3 percent from 5.25 percent in the past six months, the Fed has pumped more than half a trillion dollars in liquidity into the financial system through various emergency lending facilities.
It hopes that the downward pressure on economic growth from tightened borrowing conditions will help soothe inflation over time. But traders have begun to doubt that gamble will pay off in a world where oil and commodity prices have continuously climbed to all-time highs.
Oil peaked at $111 a barrel this week, while gold breached the $1000/oz mark.
Martin Feldstein, former head of the National Bureau of Economic Research, the official arbiter of the U.S. business cycle, said Friday the economy was already in recession and that the period of contraction could be "substantially more severe" than the last few.