* Money flows out of Treasury bills on sign of credit thaw
* Fed’s downbeat economy remarks help longer maturities
* Market participants still bet on end-October rate cut (Recasts top, adds fresh quotes, updates prices)
By John Parry
NEW YORK, Oct 20 (Reuters) - Short-dated U.S. government debt prices fell on Monday as signs of an incipient thaw in the biggest credit crisis in decades curbed safe-haven demand.
But deep-seated fears about recession, compounded by gloomy comments from Federal Reserve Chairman Ben Bernanke about the economy helped lift prices of longer Treasury maturities.
The benchmark 10-year note’s yield, which moves inversely to its price, was at 3.84 percent, near the higher end of its recent wide trading range, after a tumultuous month that has brought the global financial system to the brink of a precipice and back.
The 10-year yield has bounced between a five-year low of 3.25 percent in mid-September and a two-month high of 4.11 percent last week.
On Monday, investors were relieved the massive central bank response to fight the global financial crisis is finally lowering longer interbank lending rates, although they remain well above targets set by central banks.
“There’s still an underlying fear in the markets that continues to keep a safe bid in Treasuries. We are still not out of the woods although there are signs that maybe the real crippling nature of the financial stresses are diminishing,” said Kim Rupert, managing director, global fixed income analysis with Action Economics LLC in San Francisco.
Government bills weakened, suggesting traders are shifting money out of this ultrashort-dated debt into riskier assets such as stocks and corporate debt.
The three-month Treasury bill rate US1MT=RR rose to 1.10 percent, its highest late-session level since investment bank Lehman Brothers filed for bankruptcy on Sept. 15 and up from 0.81 percent late on Friday. The Treasury Department sold $25 billion of 3-month bills at a high rate of 1.25 percent.
“The front end is down on what’s transpired from Friday and today in the Libor space, with funding costs coming down dramatically,” said Sean Murphy, Treasury trader with RBC Capital Markets in New York.
Interest rates on three-month dollar funds in London tumbled to 4.05875 percent on Monday from 4.41875 percent on Friday. This was the biggest single-day drop in three-month Libor or London interbank offered rates in the absence of a Fed rate cut since late January. For details see [ID:nLK288525].
The 2-year Treasury note’s price was down 6/32 for a yield of 1.71 percent US2YT=RR, versus 1.62 percent late Friday.
However, prices of maturities of more than 5 years bounded higher as market participants shifted out of short-dated government paper into longer maturities on the gloomy economic outlook and as they reversed a recent shift market into shorter maturities at longer maturities’ expense, traders said.
The benchmark 10-year Treasury note’s price, which moves inversely to its yield, traded up 24/32 for a yield of 3.84 percent US10YT=RR, versus 3.94 percent late Friday.
Fed chief Bernanke said U.S. economic activity was likely to be below potential for several quarters, which provided a brief lift to short-term interest rate futures.
Traders continue to fully price in a 25 basis-point rate reduction at the Fed’s late October monetary policy setting meeting, with some angling for a deeper 50 basis-point cut.
The 30-year bond rose 1-17/32 in price for a yield of 4.25 percent US30YT=RR, down from 4.33 percent late Friday. (Additional reporting by Richard Leong; Editing by James Dalgleish)