Bonds Gain as Financials Push Down Stock Market

U.S. Treasurys prices rose Wednesday as stock market losses, particularly in the financial sector, supported a small safe-haven bid for U.S. government debt.

Early in the session, dollar weakness, higher oil prices, and better performing stock index futures depressed bond prices. But Treasury debt prices turned higher at mid-morning when stocks moved into the minus column, reviving a safe-haven bid for government debt.

At 1 p.m. ET, the benchmark 10-year Treasury note price, which moves inversely to its yield, was up 6/32, its yield easing to 3.87 percent, versus 3.89 percent late Tuesday.

"It's chiefly stocks which went from rallying overnight overseas into negative territory soon after the Wall Street open and that brought a bit of a bid back into the Treasury market," said Chris Rupkey, chief financial economist at Bank of Tokyo/Mitsubishi.

"The rally in the 10-year Treasurys looks like it has legs, but it very much depends on what happens in the stock market and perceptions about credit quality," he said.

Earnings reports for financial giants Merrill Lynch and Citigroupare due next week and "people are jittery," Rupkey said.

Credit rating agency Fitch said on Wednesday that it might cut Merrill Lynch's senior debt, issuer default ratings and placed Merrill's 'A+' IDR on rating watch negative, citing Merrill's expected ongoing write-downs and diminished earnings outlook for the rating action. Shares of Merrill Lynch were down more than 4 percent in early afternoon trade.

Federal Reserve Chairman Ben Bernanke's statement on Tuesdaythat the Fed's borrowing lines for primary dealers might stay in place into 2009 "made people think that financial risks are still very real and that there is little chance of the Fed hiking interest rates this year," Rupkey said.

U.S. crude and London Brent futures rose when Iran said it had test-fired missiles that could reach Israel and U.S. bases in the region.

Higher oil prices can be inflationary when the increased costs - directly or indirectly - reach consumers.

Dollar weakness also contributed to early inflation fears because a weaker dollar raises the cost of imported goods, including oil, for American consumers. Higher real costs diminish the real returns of fixed-income investments.

Two-year notes, typically the main beneficiary of a safe-haven bid, rose 1/32, their yields easing to 2.47 percent from 2.48 percent late Tuesday.