TREASURIES-Bonds dive as joint Fed action boosts stocks
(Updates prices, adds quote)
By Burton Frierson
NEW YORK, Dec 12 (Reuters) - U.S. Treasuries tumbled on Wednesday after the Federal Reserve teamed up with other central banks to alleviate a global credit crunch, reducing the appeal of safe-haven government bonds.
The Fed announced the creation of a temporary short-term lending facility in concert with market-calming actions by several other major central banks. For details see [ID:nL1290916].
The initiative led investors to pour money back into stocks, which they sold on Tuesday after the Fed delivered a disappointingly small quarter point cut to the overnight federal funds interest rate target.
However, the good cheer that the new measures inspired in the stock market produced the biggest sell-off in benchmark 10-year Treasuries in more than three years.
"Obviously, with everyone else I thought that yesterday was way too little and it seemed that they were not understanding the severity of the credit crunch we were heading into," said Michael Kastner, head of fixed income, at Sterling Stamos Capital Management in New York.
"I think it's a very good move. I've just been scratching my head all morning over why they did it today, why they just didn't make the announcement all at once."
Prices on five- and 10-year Treasury notes fell more than a full point and the 30-year long bond retreated more than two full points.
"RIDICULOUSLY OVERVALUED"
Benchmark 10-year notes US10YT=RR were trading down 1-16/32 in price, raising the yield to 4.16 percent from 3.97 percent late on Tuesday. Bond yields move inversely to prices.
Two-year notes US2YT=RR tumbled 17/32 to yield 3.20 percent. Five-year notes US5YT=RR were last down 1-1/32 to yield 3.55 percent.
Despite the day's fall in Treasuries, Kastner said the bond market was still too pricey.
"Even given the back-up in the two-year note back to 3.20 it's still ridiculously overvalued," Kastner said. "In order to maintain that level, the Fed has to go a long way in cutting rates. Otherwise it's not sustainable."
Wednesday's sell-off comes after Treasuries recorded their biggest rally in more than three years on Tuesday as investors sought safety amid concerns the Fed was not sufficiently aggressive in dealing with the credit turmoil.
The new initiative reversed that flight to quality and had an immediate effect on money markets, which have constricted in recent months as banks hoarded cash to write off losses related to the U.S. mortgage market meltdown.
Three-month dollar deposit rates <0#USDD=> dropped following the joint announcement. In another sign of calming credit worries, U.S. interest rate swap spreads narrowed.
"They needed a plan to rescue the financial market, and they are doing it. Bonds are selling off and stocks are going straight up," said Thomas di Galoma head of U.S. Treasury trading at Jefferies & Co. in New York. (Additional Reporting by John Parry and Richard Leong; Editing by Tom Hals)
