December 9, 2008 / 10:16 PM / 11 years ago

Demand for safety sends 3-month Treasury rates below zero

NEW YORK (Reuters) - Three-month U.S. Treasury rates dipped below zero on Tuesday amid intense demand for safe U.S. government debt and bets that the Federal Reserve will keep cutting interest rates to avert a deep, sustained recession.

U.S. Treasuries prices, which move inversely to yields, rose across the board and allowed the Treasury to sell $30 billion of four-week bills at an unprecedented high rate of 0.000 percent.

“The safe-haven needs are extreme; people are just afraid to risk their capital,” said John Canavan, analyst at Stone and McCarthy Research Associates in Princeton, New Jersey.

Deflation expectations also drove demand for short-term Treasury bills, even if those bills nominally yielded zero or less, Canavan said.

“Deflationary expectations for the next few months mean that real short-term bill yields are “not necessarily negative,” he said.

Two-year Treasury notes climbed 6/32, and yields fell to 0.84 percent from 0.94 percent on Monday.

Stock market losses after two days of solid gains helped fuel the demand for U.S. Treasuries, analysts said.

UNCONVENTIONAL EASING WEAPONS

The view that the Fed will use other methods in addition to cutting short-term interest rates to ease monetary conditions drove prices of long-dated Treasuries prices higher as well, sending yields on those maturities toward five-decade lows.

“The Fed is going to keep long-term borrowing costs low, which is going to keep the curve flat,” said T.J. Marta, fixed income strategist at RBC Capital Markets in New York.

The Fed is expected to cut short-term rates by at least half a percentage point at its policy meeting next week.

Last week Fed Chairman Ben Bernanke said the U.S. central bank could directly purchase “substantial quantities” of longer-term securities issued by the U.S. Treasury or government-sponsored agencies to lower yields and stimulate demand.

In late trade, the price on the U.S. long bond was up 2-13/32, its yield falling to 3.05 percent from 3.16 percent late Monday.

Benchmark 10-year notes rose 27/32, their yields easing to 2.65 percent from 2.75 percent late Monday.

Ten-year yields held a 180 basis points premium above two-year notes, versus 181 basis points on Monday.

Five-year Treasury notes benefited from rate-lock buying related to hedges on a $3 billion five-year note sale by Fannie Mae FNM.P, traders said.

The Treasury will sell $28 billion in three-year notes on Wednesday and $16 billion in 10-year debt on Thursday.

Persistent year-end safety bids for Treasuries should readily absorb the upcoming supply, analysts said.

Editing by Leslie Adler

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