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Treasury Yields at New Lows for the Year

Pain in the stock and riskier bond markets was taken as a sign of impending economic weakness.

The Treasury market got a huge lift today from falling stock prices and widening credit spreads, which are taken at least in part as signs of impending economic weakness. The rally pushed intermediate and long-term Treasury yields to new lows for the year.

The move occurred in spite of a big upward revision to the fourth-quarter economic growth rate. In its final revision to the data series, the government concluded that

GDP

grew at a 7.3% rate during the fourth quarter, the fastest pace since the first quarter of 1984, when it grew at a 9.0% rate. The previous estimate was 6.9%. Economists polled by

Reuters

had forecast a revision to 7.0% on average.

As the

Nasdaq Composite Index

tumbled in its fifth-largest point loss ever, the benchmark 10-year Treasury note gained 23/32 to 103 9/32, dropping its yield 9.6 basis points to 6.053%, the lowest since Nov. 17. The 30-year Treasury bond surged 1 12/32 to 105 7/32, cropping its yield 9.5 basis points to 5.878%, the lowest since May 28.

Only the two-year Treasury note's yield remained in its recent range, though it too declined substantially. The two-year note gained 5/32 to 100 1/32, dropping its yield 8.3 basis points to 6.483%. The two-year note is more directly influenced by the

fed funds rate

, which stands at 6% and is expected to rise to at least 6.25%, than longer-maturity issues are.

At the

Chicago Board of Trade

, the June

Treasury futures contract gained 1 3/32 to 97 6/32.

Falling stock prices benefit the Treasury market through a variety of intersecting channels. Some of the money that left the stock market presumably flowed into the bond market. Also, fear of additional losses in the stock market makes Treasuries, where losses happen on a smaller scale, more appealing as an alternative. Finally, falling stock prices invite speculation that economic growth will slow significantly, a scenario under which bonds should outperform.

The Treasury market also benefited from pain in the riskier bond markets, especially the agency bond market. Swap spreads, a proxy for the risky bond markets, have been scaling to new heights every day for the last week, indicating loss of appetite for those products.

It's not unusual for swap spreads to widen when the stock market is aching. But some Treasury market analysts remain hesitant to embrace widening swap spreads as a positive sign for their market, in part because exogenous factors have been affecting swap spreads, and in part because much of the evidence shows that the economy continues to grow at a rapid clip.

"Trends and probabilities tell you the market can't do much better in light of economic conditions," said Tony Crescenzi, chief bond market analyst at

Miller Tabak

. And yet, it feels very risky to bet against the Treasury market when the stock market is wobbling, swap and credit spreads are widening, and long-term yields are lower than short-term yields -- a sign that some investors see even lower long-term yields ahead. Crescenzi described his current view as "bearish, but with respect for these signals that could become very meaningful."

To boot, Crescenzi said, heavy volume in the cash bond market today and yesterday shows that "you do have real money behind this trade," as opposed to being a speculative, futures-driven phenomenon.

The problem is that at least a portion of the underperformance of risky bonds is attributable to factors that Crescenzi says have "no predictive value." Chief among them: government initiatives to reevaluate the advantages that agency issuers enjoy over other corporate issuers.

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In the meantime, even people who are bullish on Treasuries over the long term (through, say, the end of the year) are having trouble justifying current prices. "I think the market's in very good shape in the months ahead, but it's ahead of itself on a near-term basis," said Michael Krauss, chief technical strategist at

Chase Securities

.

Krauss sees the 10-year note's yield at 5.75% at year-end, and the 30-year's at 5.50%. "But I wouldn't be surprised if the next 20 basis points were toward higher yields." The initiatives to reduce the supply of Treasuries "will maintain an underlying bid, but the market has come too far too fast in the month of March," Krauss said.

A move up in yields over the next six weeks wouldn't be surprising, Krauss added. Historically, Treasury yields have often risen through April and into May, when the Treasury's quarterly auctions of new notes and bonds roll around. The impending supply causes prices to fall.

Economic Indicators

In other economic news, the weekly tally of

initial jobless claims

rose slightly to 266,000 from a revised 263,000 the previous week. But the four-week average of first-time claims for unemployment insurance dropped to a new generational low of 268,000, indicating that the labor market remains extremely tight.

Also, the

Help-Wanted Index

slipped to 88 in February from 89 in January. A year ago it stood at 93.

Currency and Commodities

The dollar weakened against the yen and the euro. It lately was worth 105.44 yen, down from 105.73. The euro was worth $0.9612, up from $0.9514. For more on currencies, please take a look at

TSC's

new

Currency Watch column.

Crude oil for May delivery at the

New York Mercantile Exchange

rose to $26.70 a barrel from $26.45.

The

Bridge Commodity Research Bureau Index

rose to 211.39 from 210.31.

Gold for April delivery at the

Comex

rose to $279.10 an ounce from $278.70.