TREASURIES-hold gains in Asia as credit concern persist
TOKYO, Dec 4 (Reuters) - U.S. Treasuries held overnight gains in Asia on Tuesday as investors remained cautious about more fallout from credit market problems, enhancing demand for safe assets.
Boston Fed President Eric Rosengren said on Monday the U.S. economy would likely grow "well below" its potential over the next two quarters before recovering gradually later next year, cementing expectations that the Fed is ready to cut interest rates again next week and beyond into 2008.
San Francisco Fed President Janet Yellen echoed other key Fed officials late on Monday in saying that financial conditions have deteriorated since the last rate-setting meeting in October.
"Recurring news about credit problems are spooking market players when the market condition is already difficult to trade with extremely thin liquidity which is casing high volatility in prices," said a senior trader at a U.S. investment bank.
March 10-year futures TYv1 rose 8.5/32 to 114-05/32, crawling further towards the 3-1/2-year high of 114-31/32 hit last week.
Benchmark 10-year notes US10YT=RR were nearly flat in price to yield 3.853 percent from late U.S. trade on Monday when the yield fell 7 basis points. The 10-year yield stayed a touch above 3.7945 percent hit last week, the lowest since early 2004.
The two-year notes US2YT=RR were also little changed in price to yield 2.865 percent, after touching a three-year low of 2.852 percent earlier in the session.
Traders said repeated comments from Fed officials about the weak U.S. economic outlook and fears about more fallout from the credit squeeze were reinforcing expectations of further Fed rate cuts, boosting short-dated bond prices.
The credit squeeze, triggered by rising defaults in risky subprime mortgages, has broadly hurt the financial sector.
Further dimming the outlook for credit markets, rating agency Moody's Investors service said on Tuesday it had downgraded the ratings of deals issued by Merrill Lynch this year based on subprime mortgage loans [nWNA7969].
Bond investors expect the Fed to respond to the credit crunch and mitigate a recession by cutting benchmark interest rates to 4.25 percent at its policy meet on Dec. 11, having slashed rates by 75 basis points since mid-September.
Reflecting the market turbulence and financial system strains, two-year swap spreads are now some 32.5 basis points above the 10-year swap spread at 100.5 basis points SMKR99.
Before the subprime crisis worsened in August, the two-year spread was typically 10-15 basis points below the 10-year spread.
The two-year spread is typically seen as a gauge of the financial system's health and level of systemic risk.
