TREASURIES-Jump in Asia as investors see more Fed cuts
By Chikako Mogi
TOKYO, Feb 29 (Reuters) - U.S. Treasuries jumped in Asia on Friday with buying from Asian and Japanese investors pushing two-year yields to fresh four-year lows, as Federal Reserve Chairman Ben Bernanke reinforced expectations for more rate cuts.
Bernanke on Thursday said he expected there would be some failures of smaller regional banks that invested heavily in real estate, but added that capital ratios among the largest banks remained good. He also said the Fed was in a more difficult position now to respond to a slowing economy than it was in 2001.
A surprise big jump in initial weekly jobless claims added to mounting concerns of a U.S. recession, while broader problems in financial services were highlighted when American International Group Inc (AIG.N) posted its biggest-ever quarterly loss, hurt by a write-down of securities exposed to bad mortgage investments.
"The huge losses at AIG along with Bernanke's warnings about small banks and remarks suggesting a U.S. recession all point to yields falling further," said a trader at a Japanese trust bank.
"Japanese banks and Asian investors are believed to be buying Treasuries in Asian time, and buying for month-end duration needs may be drawing investors to five- and 10-year zones as well," he said.
Treasury futures TYv1 jumped more than a half point, trading up 19/32 to 117-23.5/32.
Benchmark 10-year notes US10YT=RR rose 10/32 in price to yield 3.636 percent US10YT=RR, down 4 basis points from late New York trade.
Two-year notes US2YT=RR rose 3/32 US2YT=RR in price to yield 1.768 percent after hitting a four-year low of 1.729 percent, falling around 10 basis points from late U.S. trade.
The two-year/10-year yield spread widened to around 190 basis points, pushing towards 192 basis points hit two weeks ago for the first time since mid-2004.
The Fed is widely expected to cut its benchmark federal funds rate by 50 basis points from the current 3.0 percent at its policy meeting next month FEDWATCH.
The trader at the Japanese trust bank said that with the Fed's aggressive easing coming in the face of inflation pressures from rising oil and commodities prices, the yield curve will likely steepen over the longer term, pulled up by long-dated maturities.
"Two-year yields, at most, will likely find a floor around 1.5 percent, and settle around 1.7 percent over the medium-term. Longer yields have a bigger scope for rising, as a weak dollar could further aggravate the inflation outlook," he said, adding that the 10-year yield would have a hard time breaking below 3.5 percent.
The dollar fell to a three-year low against the yen earlier on Friday and hovered near record lows against other currencies. (Editing by Chris Gallagher)
