(Recasts lead, updates market action)
By Richard Leong
NEW YORK, Jan 11 (Reuters) - U.S. Treasuries rose on Friday with yields falling for a fourth straight week, prompted by a stock rout tied to renewed recession fears and near certainty of a bold interest rate cut from the Federal Reserve.
Investors sought safe haven in U.S. government debt, as stocks snapped a two-day rally on a report saying Merrill Lynch MER.N would suffer a $15 billion loss on bad mortgage investment and profit warnings from credit card companies American Express (AXP.N) and Capital One Financial (COF.N). For more, see [.N].
Warnings from consumer finance companies and retailers this week have underscored the downside risks to the economy, which were also stressed by Fed Chairman Ben Bernanke and other central bank officials in speeches.
Major U.S. stock indexes ended lower on Friday, falling three weeks in a row. The Dow Jones Industrial average .DJI skidded nearly 250 points or 2 percent on the day, losing 6 percent over a three-week span.
“The (stock) market is running out of bullets for support,” said George Goncalves, chief Treasury/TIPS and agency strategist with Morgan Stanley in New York.
The stock sell-off, together with a grim economic outlook and a Federal Reserve signaling easier monetary policy ahead, have breathed new life into a seemingly fatigued bond market.
Two-year Treasury notes US2YT=RR, which respond closely to expectations for moves in official interest rates, were up 7/32 in price to yield 2.58 percent, its lowest since November 2004. The two-year yield, which moves inversely to prices, was 2.70 percent late Thursday and 2.74 percent a week ago.
Longer 10-year debt US10YT=RR was up 24/32 in price yielding 3.80 percent, its lowest since March 2004. Its yield, which serves as benchmarks for U.S. bonds and most mortgage interest rates, ended lower than the 3.89 percent seen late Thursday and 3.88 percent a week ago.
Short-term U.S. interest rate futures have fully priced in a 50 basis point rate cut at the Fed’s next policy-setting meeting on Jan. 29-30 and indicated about a one in three chance of 75 basis points in cuts by then.
Meanwhile, two-thirds of the U.S. primary dealers are now looking for an aggressive rate move from the Fed to forestall a recession, rather than a modest 25-basis-point rate cut. For more, double-click on [ID:nNYC000062].
“The Fed seems to be more willing to respond aggressively with adjusting interest rates,” said Derrick Wulf, portfolio manager at Dwight Asset Management in Burlington, Vermont.
On Friday, Fed Governor Frederic Mishkin said the central bank will act decisively to counter the fallout from the financial market turmoil on economic growth.
“The disruption in financial markets poses a substantial downside risk to the outlook for economic growth, and adverse economic or financial news has the potential to cause further strains,” Mishkin told a symposium organized by the New York regional Fed bank. For more details, see [ID:nN11303924].
Despite recession worries, the specter of inflation has not disappeared, according to traders and analysts.
Any upside surprises in next week’s government inflation reports — the Producer Price Index and the Consumer Price Index — could take some steam out of the current rally, they said. (Additional reporting by John Parry; Editing by James Dalgleish)