Treasury rose

Treasuries Rise as Losses in Stocks, Subprime Mortgages Spread
By Wes Goodman

Aug. 1 (Bloomberg) -- Treasury notes rose for a second day as stocks dropped and losses at hedge funds widened, feeding demand for the relative safety of government debt.

Ten-year yields declined to the lowest since May after Bear Stearns Cos. blocked investors from taking money out of a fund that included mortgage bonds. Macquarie Bank Ltd., Australia's largest securities firm, said investors in two of its funds may lose 25 percent of their money.

``Treasuries are looking to equities for guidance,'' said Edward Lee, a strategist at Standard Chartered Bank in Singapore. ``They're an indication of the outlook for the economy. We look for the Fed to cut'' interest rates to spur growth in the economy.

The yield on the benchmark 10-year note fell 2 basis points to 4.71 percent as of 7:42 a.m. in London, according to bond broker Cantor Fitzgerald LP. The price of the 4 1/2 percent security due in May 2017 rose 1/8, or $1.25 per $1,000 face amount, to 98 10/32. A basis point is 0.01 percentage point.

The Federal Reserve will probably reduce borrowing costs in December, and the 10-year yield will fall to 4.8 percent by year-end, Lee said.

Treasury rates mostly moved in the same direction as U.S. shares in the last two weeks. The 10-year yield and the Standard & Poor's 500 Index had a correlation of 0.85. A figure of 1 would indicate they moved in lockstep.

92 Percent Odds
Futures contracts show there is a 92 percent chance the central bank will cut its target for overnight loans between banks by a quarter percentage point in December to 5 percent. The odds have risen from 32 percent a week ago.

Ten-year notes yield 23 basis points more than two-year Treasuries, from 14 basis points a month ago, indicating investors sought shorter maturities in the flight to safety.

Bear Stearns, manager of two hedge funds that collapsed last month, halted redemptions from a third fund after a slump in credit markets prompted investors to demand their money back.

The Bear Stearns Asset-Backed Securities Fund had about $900 million invested in asset-backed securities, including mortgage bonds, spokesman Russell Sherman said yesterday. The fund was overwhelmed by redemption requests, he said.

Macquarie Bank was forced to sell assets to avoid breaching its loan agreements, the firm said in a statement.

Gains in Treasuries may be limited before a private report that economists say will show manufacturing in the U.S. increased in July at close to the fastest pace in more than a year.

Narrowing Yield Premium
The Institute for Supply Management's factory index will be 55.3, versus 56 in June, according to the median forecast in a Bloomberg News survey of economists. Readings above 50 point to growth.

``Investors are buying Treasuries as a safe haven,'' said Kazuaki Oh'e, a debt salesman at CIBC World Markets in Tokyo. ``People who have to shift out of equities are buying. Other parts of the U.S. economy should be fine.''

Yields have fallen enough that they don't offer much value, Oh'e said.
U.S. 10-year notes yield 2.90 percentage points more than same-maturity bonds in Japan, narrowing from 3.36 percentage points in June. The U.S. 10-year premium versus German bonds narrowed to 35 basis points from 77 basis points in February.

Increasing Risk
Japanese corporate bond risk rose, according to credit- default swaps.

Contracts based on debt included in the iTraxx Japan Series 7 Index of 50 investment-grade companies increased in Tokyo, according to JPMorgan Chase & Co. prices. The cost of the contracts rises as perceptions of credit quality worsen; a decline suggests improvement.
Treasuries rose in July on speculation a U.S. housing slowdown and losses in mortgage-linked bonds will hurt the economy. An index of corporate bonds fell for the third month, according to data compiled by Merrill Lynch & Co.

The bond market's inflation expectations are declining. Ten-year notes yielded 2.35 percentage points more than similar- maturity Treasury inflation-protected securities, narrowing from 2.49 percentage points on June 12. The figure represents the inflation rate that traders expect for the life of the securities.