NEW YORK -- U.S. Treasuries extended a two-month rally on Wednesday as concerns over vanishing credit forced investors to buy short-dated government debt.
The crisis showed signs of worsening with rumors swirling suggesting a primary bond dealer and big mortgage lender, Countrywide was having trouble raising capital.
Government securities, perceived as a safe-haven in times of financial stress, were in high demand.
"You can't be short this market," said Marty Mitchell head of government bond trading at Stifel Nicolaus in Baltimore. "There's just too much out there and we're only at the beginning of it."
Story Continues Below
This general sentiment has prompted a massive downward adjustment in bond yields. Rates on two-year notes have plunged more than 80 basis points in just two months. On Wednesday alone, yields pulled back six basis points to trade around 4.30 percent.
Very short-term debt was also becoming a prized possession, with the 3-month bill swooning to its lowest yield since December 2005. Long-dated instruments, in contrast, witnessed a rise in yields Wednesday.
Many see the liquidity and credit crunch as enhancing the chances of an interest-rate cut from the Federal Reserve, with futures markets pricing in just such a possibility.
The Federal Reserve has yet to signal any intention to reduce rates, reiterating recently that inflation was its primary concern, but it has dealth with the day-to-day cash flow issues in the market with more infusions of cash, including another $7 billion on Wednesday.
But many say it is only a matter of time before the Fed's worst case scenario, a housing-led downturn in consumer spending, materializes in full force.
Analysts say the likelihood of such a development has significantly increased since the onset of the current financial crisis, where big hedge funds and investment banks have been reporting massive losses.
This is already restricting companies' ability to raise capital, but it could also stifle a cash-strapped consumer, whose spending is fueled in part by easy access to credit.
Data released on Wednesday painted a generally upbeat economic picture, but the numbers were all too backward looking to offer any insights into how consumers have been feeling since the credit and liquidity problems began.
U.s. core consumer prices were reported close to forecasts, growing at a steady 2.2 percent year-on-year, still above the Fed's comfort range of 1.0 percent to 2.0 percent, but traders were too obsessed with tightening credit to pay the figures much attention.
© Reuters 2007. All rights reserved. Republication or redistribution of Reuters content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Reuters.
Editor's note:
The 99 stocks you need to dump in 2007 . . . and the 10 to buy! Get our free report today.
Bernanke Reveals `Fiscal Crisis` Ahead
Cash in on dollar slide. Make 25 to 50% in six months.
