Treasury note and bond prices ended sharply higher as investors bought heavily into money instruments. The decision of the Federal Reserve yesterday to watch the economy closely but leave interest rates unchanged remained uppermost in investors' minds as they fled the sagging equity markets, seeking solace in Treasuries. Bond yields decreased, recharting their lows for the year.

"What we are seeing is a continuation of yesterday, with clear signs of the economy slowing, risk of inflation decreasing and that of a recession increasing. And what has been happening to stocks because of weak corporate earnings is the other major factor," said Joseph Shatz, government bond strategist at

Merrill Lynch

. He felt that the bond market was looking to the Fed to ease interest rates many times next year, and has already accounted for it lowering the rate by least 25 basis points at the Jan. 30-31 meeting.

The benchmark 10-year

Treasury note rose 27/32 to 105 1/32, lowering its yield 14.5 basis points, to 5.047%.

The 30-year

Treasury bond rose 1 5/32 to 112 11/32, lowering its yield 7.1 basis points, to 5.408%.

Jim Kochan, senior bond market strategist at

Robert W. Baird

, felt that Treasuries reacted primarily today to equities. "The equity markets were more convinced of the Fed lowering interest rates and are expressing deep disappointment. With the equities going down, bonds are trading up," he noted.

Both Shatz and Kochan acknowledged the 'flight-to-quality' buying taking place, during which the markets get so weak that participants try to protect their holdings, and their first response is to buy U.S. Treasuries.

Kochan didn¿t think that the

gross domestic product

(

definition |

chart |

source

) numbers to be announced tomorrow morning would have much of an effect on the bond price movement. "GDP numbers are expected to be weak, and the market has already taken note of that. The figures for the

durable goods orders

(

definition |

chart |

source

), to be brought out the day after, may have more of an impact since they are so volatile, and could startle the market."

The bottom line for him today though was the

Nasdaq, which was "flirting with some pretty ugly technicals." The tech-heavy index ended off 179, or 7.1%, to 2333.

At the

Chicago Board of Trade

, the March

Treasury futures contract rose 20/32 to 105 4/32.

Economic Indicators

Bond prices were rising despite signs of strength in the housing sector of the economy.

Housing starts

(

definition |

chart |

source

) rose more than expected in November to 1.562 million from 1.528 million in October. Economists polled by

Reuters

had forecast a rate of 1.536 million. Analysts did note that all of the increase was in the multifamily units, and they ascribed it to little more than normal volatility.

In other economic news, the weekly

Mortgage Applications Survey

(

definition |

chart |

source

) detected an increase in refinancing and a decrease in new mortgage activity as mortgage interest rates fell to new lows for the year. The Refinancing Index rose to 777.2, the highest since May 1999. The Purchase Index fell to 302.2.

The increase in refinancing helped bonds as well. Managers of mortgage-backed security portfolios have been snapping up Treasuries, fearing that lower interest rates will accelerate home refinancing and early prepayments of mortgage loans. Such activity would ultimately force them to reinvest in funds at less attractive interest rates.

Currency and Commodities

The dollar rose against the yen and fell against the euro. It lately was worth 112.72 yen, up from 112.40. The euro was worth $0.9094, up from $0.8943. For more on currencies, see

TSC's

Currencies column.

Crude oil for January delivery at the

New York Mercantile Exchange

was unchanged at $29.33 a barrel.

The

Bridge Commodity Research Bureau Index

fell to 227.57 from 228.27.

Gold for February delivery at the

Comex

rose to $275.4 an ounce from $274.7.