Treasuries rose on concern a $700 billion plan to calm market turmoil may be stalled in Congress, fueling demand for the safest assets.
Yields on two-year notes fell for a second day as Federal Reserve Chairman Ben S. Bernanke warned lawmakers that failure to pass the plan to take over troubled assets from financial firms would pose a threat to markets and the economy.
"The safest asset is Treasuries, so people want to buy them," said Matthew Moore, an interest-rate strategist in New York at Banc of America Securities LLC, one of the 19 primary dealers that trade with the central bank. "This was a pretty strong statement from Bernanke advocating the Treasury plan."
The two-year yield fell 11 basis points, or 0.11 percentage point, to 2.06 percent at 8:10 a.m. in New York, according to BGCantor Market Data. The 2.375 percent security due August 2010 increased 6/32, or $1.88 per $1,000 face amount, to 100 19/32. Ten-year yields declined 4 basis points to 3.80 percent.
"Action by the Congress is urgently required to stabilize the situation and avert what could otherwise be very serious consequences for our financial markets and for our economy," Bernanke said in testimony prepared for delivery today to the Senate Banking Committee. "Global financial markets remain under extraordinary stress."
Bonds gained earlier as stocks declined. The MSCI Asia Pacific Excluding Japan Index slipped 0.4 percent, its first drop in three days, while the Dow Jones Stoxx 600 Index of European equities lost 1.8 percent. Standard & Poor's 500 index futures contracts for December delivery fell 0.4 percent.
Bernanke and Treasury Secretary Henry Paulson are due to discuss the rescue package before the Senate Banking Committee at 9:30 a.m. in Washington.
Alabama Senator Richard Shelby, the top Republican on the Senate Banking Committee, said yesterday the proposal is "neither workable nor comprehensive, despite its enormous price tag."
Leaders of the Republican Study Committee, a group of more than 100 self-described conservative House members, have criticized the administration's response to the crisis. Texas Representative Jeb Hensarling called it "bailout mania."
Investors have sought the relative safety of government debt as credit markets seized up. The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, was 2.12 percentage points, versus the average for the past two years of 0.91 percentage point. The spread was 3.13 percentage points on Sept. 18, the most since Bloomberg began compiling the figures in 1984.
Futures contracts on the Chicago Board of Trade show a 52 percent chance the Fed will reduce its 2 percent target rate for overnight bank lending by at least a quarter point this year. The odds rose from 49 percent yesterday.
"The short end is the sweet spot," said Peter Jolly, head of markets research at NabCapital in Sydney, the investment- banking unit of National Australia Bank Ltd., the country's largest lender. "The Fed may need to cut interest rates again. People are still foreclosing on their homes in the U.S. The banking system is still short of capital."
Two-year Treasuries have returned 0.6 percent this month, versus 0.2 percent for 10-year notes, according to indexes of the securities compiled by Merrill Lynch & Co.
Home resales declined to an annual pace of 4.94 million last month from 5 million in July, according to a Bloomberg News survey of economists before the National Association of Realtors issues the figure tomorrow. A Commerce Department report the next day will show sales of new houses dropped to a 510,000 annual rate from 515,000, a separate survey showed.
The cost of the rescue package is raising speculation the U.S. plans to pay for it by auctioning more long-term debt. The plan, which asks Congress for funds to buy devalued securities from financial institutions, would drive the debt above 70 percent of gross domestic product and the annual budget gap to an all-time high, possibly exceeding $1 trillion next year, economists estimated.
"We probably saw the low in bond yields," said Felix Stephen, senior investment strategist at Advance Asset Management Ltd. in Sydney, whose International Fixed Interest bond fund returned 5.1 percent so far this year, beating 83 percent of its competitors. "There is a large chunk of paper to be issued."
Ten-year yields may rise to 4.75 percent in the second half of next year, Stephen said.
The Treasury Department is increasing its scheduled note sales to meet the government's borrowing needs with a record $34 billion auction of two-year securities tomorrow. It is selling $24 billion of five-year debt the following day, the most since February 2003.
Paulson is asking lawmakers to lift the legal ceiling on the federal debt to a record $11.3 trillion from the current $10.6 trillion at a Senate Banking Committee hearing today. Gross U.S. debt, which includes debt held by the public and by government agencies, this year reached about $9.6 trillion, or about 68 percent of gross domestic product.
The budget deficit may surpass $900 billion in the fiscal year that starts Oct. 1, David Rosenberg, Merrill Lynch's North American economist in New York, wrote in a client note. Public debt sales may total $1.5 trillion in the same period, according to JPMorgan Chase & Co.'s chief economist Bruce Kasman.
Inflation expectations rose after crude oil surged by a record $16 a barrel yesterday, yields indicate. The difference between yields on 10-year Treasury Inflation Protected Securities, or TIPS, and conventional notes widened to 1.96 percentage points, from 1.60 percentage points in the middle of last week. The figure represents the inflation rate that traders expect for the next decade.
Supply is only a "mediocre" indicator of where yields are going, said Ira Jersey, an interest-rate strategist at Credit Suisse Holdings USA Inc. in New York.
"If you look at the 1980s, for example, we had massive amounts of Treasury supply, yet yields came down quite substantially," Jersey said yesterday on Bloomberg Television. "Treasuries are going to be a substitute for other risky assets that aren't being issued." Investors should be more concerned about inflation, he said.
Ten-year yields declined to 6.92 percent in 1986 from 15.8 percent in 1981.