Bonds Gain Amid Lingering Recession Fears

Treasury debt prices rose on persistent worries about a US recession and the banking system and as stock market euphoria about a deep Federal Reserve rate cut the day before began to fade.

A fall in US crude oil prices, down about $3 per barrel near $106 in a broad commodities sell-off, temporarily assuaged investors' jitters about inflation, helping long maturity bonds.

Treasurys were held back briefly after a government regulator cleared the wayfor Fannie Mae and Freddie Mac to buy more mortgages, which was initially seen likely to buoy the mortgage-backed securities market and draw more investors out of the safe haven of Treasurys into non-government fixed-income securities.

But in a second wave reaction, bond investors bought long dated Treasurys as an alternative to long-dated debt from the two mortgage agencies, on expectations that Fannie Mae and Freddie Mac may have to issue more debt.

"People are disappointed by the size of the cut in the capital constraints for the GSEs," said Matthew Moore, economic strategist with Banc of America Securities, N.Y.

"They expect more long dated agency issuance which runs the risk of cheapening that," and would make long-dated Treasurys more attractive, Moore said.

A sell-off on commodity markets could also be raising tentative hopes inflation pressures may ease, which might help long maturity Treasury bonds, analysts said.

"The back off in commodity prices...is leading to yield curve flattening," wrote Andrew Brenner, analyst at MF Global in New York in an email note. "The long end is strong," he wrote.

The yield curve, or gap of 10-year note yields above 2-year notes, narrowed to about 177 basis points from 186 basis points late Tuesday.

The benchmark 10-year Treasury note's price, which moves inversely to its yield, rose 16/32 for a yield of 3.44 percent versus 3.50 percent late Tuesday.

On Tuesday, the 10-year yield rose 17 basis points in the biggest single-day leap in nearly four years as the safety bid unwound and stocks surged. The Fed slashed its benchmark federal funds rate by 75 basis points to its lowest level since February 2005.

Yet stock investors' cheer about the Fed action was somewhat restrained by lingering recession concerns, with the Dow Jones industrial average trading near flat at 12,404 points.

"Treasury prices are up because of the concern that the Fed is behind the curve and that the recession, which has probably started, is going to be deeper than people had originally hoped and there is not much the Fed can do about it," said Benjamin Halliburton, chief investment officer at Tradition Capital in Summit, N.J. "That has taken over market psychology," he added.

The 2-year Treasury note's price was down 2/32 for a yield of 1.67 percent , versus 1.64 percent late Tuesday.