September 29, 2008 / 4:07 PM / 11 years ago

TREASURIES-Bonds surge on global bank concerns, stocks fall

* Safe-haven bid ignites on global bank woes

* Credit stress intensifies

* U.S. bailout for banking system not viewed as panacea

* Benchmark note briefly gains 2 full points in price

By John Parry

NEW YORK, Sept 29 (Reuters) - U.S. Treasury debt prices tore higher on Monday in one of the biggest rallies of the year as fears of spreading bank failures overshadowed moves by central banks to pump hundreds of billions of dollars to thaw markets.

While the U.S. government’s $700 billion bank bailout plan looked closer to being passed by lawmakers, it did little to lift investors fears about the stability of global financial system. Many major stock indexes fell more than 4 percent, firing safe harbor bids for government bonds.

The 30-year Treasury bond’s price US30YT=RR rose more than three full points, while the benchmark 10-year Treasury note’s price US10YT=RR briefly gained 2 full points.

Governments across Europe intervened to prop up or nationalize banks, sending investors scrambling for safe-haven government debt, even after the Federal Reserve said it would substantially increase currency swap limits to $620 billion with nine major central banks.

“The Treasury market was already rallying strongly and has spiked to new highs in the wake of this (Fed announcement), in part related to the crisis nature of the actions,” said John Canavan, market analyst at research company Stone & McCarthy in Princeton, New Jersey.

Stress in interbank lending markets intensified, leaving banks increasingly dependent on central banks for short-term funding.

“There were some (bank) failures overseas and that took the stock market down and gave Treasuries a flight-to-quality bid,” said John Spinello, Treasury bond strategist with Jefferies & Co in New York.

The 10-year Treasury note’s price, which moves inversely to its yield, rose 1-21/32 for a yield of 3.68 percent US10YT=RR, versus 3.85 percent late Friday. The benchmark note gained 2 full points in price, on track for its biggest gain since Sept. 15 in the wake of the bankruptcy of investment bank Lehman Brothers Holdings Inc.

Bond investors were starting to look more closely at the U.S. government bailout plan, and questions about its details were adding to the safe-haven appeal of U.S. government debt, Spinello said.

Ultra-short-dated Treasury paper was a main beneficiary as investors once again sought a safe refuge for their money. One-month Treasury bill rates US1MT=RR slipped briefly to about 0.05 percent, down from about 0.12 percent late Friday and offering negligible returns in exchange for safety.

The interbank cost of borrowing three-month dollars and euros rose on Monday, while the three-month euro Libor rate/OIS spread widened to a record, the British Bankers Association’s latest daily fixing showed.

Treasuries briefly pared their gains after the Federal Deposit Insurance Corp said that Citigroup (C.N) would acquire the banking operations of Wachovia Corp WB.N but the U.S. government bond market rally soon resumed.

Investors are vacillating between euphoria and despair about the latest U.S. bank to stumble, said Doug Roberts, chief investment strategist with Channel Capital in Shrewsbury, New Jersey.

“First, there is despair that we are now approaching this landmine called Wachovia,” said Roberts. “The landmine is deactivated, we go to euphoria and now we see the next landmine coming up. This credit crunch is now spreading overseas. People are starting to realize regarding the bank bailout that no matter what we do, essentially things will be left dire.”

Heightened stress in the European banking system, where authorities were forced to rescue Benelux’s Fortis and the UK’s Bradford & Bingley, added to the global uncertainty despite news from Capitol Hill of agreement being reached on the plan.

In the United States, market participants added to bets for a deep Federal Reserve rate cut as soon as next month, driving a bid into shorter-maturity Treasury notes.

Short-term U.S. interest rate futures now show more than a 50-percent chance that the Fed will slash its benchmark lending rate by 50 basis points in October, to 1.5 percent.

The 2-year Treasury note’s yield, which moves inversely to its price, fell 20 basis points to 1.89 percent US2YT=RR from 2.09 percent late Friday.

The 30-year Treasury bond traded up about 3 full points in price for a yield of 4.21 percent US30YT=RR, versus 4.37 percent late Friday. The 30-year bond last rose three full points just after the Lehman Brothers bankruptcy, when the yield fell to the lowest in 45 years below 4 percent. (Editing by Tom Hals)

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