Treasury Prices Continue to Climb

NEW YORK -- Treasurys extended their climb in U.S. trading Friday, with the yield curve steepening futher, amid continued credit jitters.

Central banks around the world injected liquidity into local money markets, in a bid to bring ultra-short-term borrowing costs down.

At 11 a.m. EDT, the 10-year Treasury note was up $3.44 per $1,000 in face value, or 11/32 point, from its level at 5 p.m. Thursday. Its yield, which moves in the opposite direction, fell to 4.74 percent from 4.78 percent.

The 30-year bond rose 24/32 point. Its yield fell to 4.97 percent from 5.03 percent.

The 2-year note rose 2/32 point. Its yield fell to 4.42 percent from 4.45 percent. Earlier Anxious investors seeking the safety of government debt sent the yield tumbling to as low as 4.34 percent

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Yields on 3-month Treasury bills were 4.55 percent as the discount rate fell 0.23 percentage point to 4.43 percent.

The gains came after the European Central Bank, responding to continued tension in world credit markets and strong demand for cash, added 61.05 billion euros ($83.51 billion) to money markets at a weighted average allotment rate of 4.08 percent. The tender differs from Thursday's, when the bank offered unlimited funds at a guaranteed fixed 4.0 percent rate, as the money market overnight rates shot up to 4.7 percent.

Overnight, central banks from Japan to Australia injected larger-than-usual amounts into the domestic money markets.

European stocks also plunged on credit woes, with investors shaken up by further subprime news, namely that Countrywide Financial Corp. said it faces "unprecedented disruptions" in debt.

"You're seeing a potentially huge problem in Europe, if you judge by the reaction of the various central banks," said T.J. Marta, fixed income strategist at RBC Capital Markets. "People don't want to deal with each other because they're not sure of the other's ability to repay the loans."

The federal funds rate was also sharply higher Friday in a sign of banks' demand for reserves as the market heads into the weekend. The rate shot to 6 percent, sharply higher than the 5.25 percent target rate. It also rose sharply Thursday, with the Fed injecting $24 billion into the system via a 14-day and one-day repurchase agreement. Friday the Fed added $19 billion in an earlier-than-usual money market operation. That brought the fed funds rate back down to 5.375 percent.

"We are lining up for a nasty Monday with more headline risk over the weekend," said Tom di Galoma, managing director and head of Treasurys at Jefferies & Company in New York. The market is "looking for a Fed response."

Further boosting Treasurys, stocks were lower in the U.S., following sharp declines overseas.

The turmoil in credit markets sent risk premiums on credit derivative indexes sharply wider, with the high-grade CDX index 0.09 percentage point wider and the high volatility index 0.15 percentage point wider early Friday, according to a note from Barclays Capital. "Everything is really down," said Scott MacDonald at Aladdin Capital Management. "It's a pivotal day for the markets."

There was news late Thursday from Countrywide Financial that it and other mortgage lenders face "unprecedented disruptions" in debt and mortgage-finance markets that could hurt the company's financial condition.

The company, the largest U.S. home mortgage lender in terms of loan volume, said that reduced demand from investors is prompting it to retain more of its loans rather than selling them.

RBC's Marta said that dealers are being told to reduce their holdings of all types of debt, in light of the recent market woes, which should lead to further pressure on anything that's not short-term U.S. Treasurys, especially agencies and mortgage backed securities.

Market participants are unlikely to go into the weekend short on Treasurys, strategists said, with everyone on edge for more bad subprime-related news.

It's "impossible to determine the extent and magnitude of the situation," Jefferies' di Galoma said, "and market levels remain subject to emotion, needs, and fear."

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