Bonds slip as stocks surge on Lehman buyout talk

By Ellen Freilich

NEW YORK (Reuters) - U.S. Treasuries slipped on Thursday as stocks surged in late trade on a report that investment firm Lehman Brothers Holdings was shopping itself to possible suitors, causing investors to unwind safe-haven bids for U.S. government debt.

Bonds spent much of the day in the plus column as stocks fell and investors fretted over the health of the financial sector and the U.S. economy as a whole. The latest weekly jobless claims report from the U.S. Labor Department showed that the job market was still soft.

But bonds turned lower as stocks rallied after The Wall Street Journal reported that Bank of America was among potential suitors for Lehman Brothers.

The Dow Jones industrial average ended up 164.79 points, or 1.46 percent, at 11,433.71.

"The primary driver for bonds has been news coming out of the financial sector," said Thomas Higgins, chief economist at Payden & Rygel. "Last week it was Fannie Mae and Freddie Mac. Now it's Washington Mutual and Lehman."

Washington Mutual corporate bonds fell to more deeply distressed levels on Thursday as concerns mounted about the savings and loan's mortgage losses.

In late trade, the benchmark 10-year Treasury note was down 3/32 in price, its yield at 3.65 percent, up from 3.64 percent late on Wednesday.

Two-year notes slipped 2/32, their yields rising to 2.23 percent from 2.21 percent.

"Bonds responded to how the equity market traded and to the developments surrounding Lehman," said William Sullivan, chief economist at JVB Securities Group in Boca Raton, Florida. "So when the markets concluded that Lehman would not collapse, that there would be a White Knight, some kind of rescue package, we got a recovery in stocks and profit-taking in Treasuries."

Bonds got support early in the day from government data showing the number of continued jobless claims shot up to the highest reading since October 2003, and well above forecasts. Claims for people remaining on unemployment benefit rolls after drawing an initial week of aid jumped by 122,000 to 3.53 million in the week ended August 30.

Data on Thursday also showed the U.S. trade deficit widened much more than expected in July to $62.2 billion as average oil prices jumped and the volume of crude oil imports grew to the highest level in four years.

The government also said U.S. import prices fell during August for the first time this year as costs for imported oil tumbled by the most in more than five years.

Five-year Treasury debt prices fell 3/32, their yields rising to 2.93 percent from 2.91 percent late on Wednesday, while the 30-year bond slipped 1/32, its yield rising to 4.23 percent from 4.22 percent.

(Editing by Leslie Adler)