Treasuries Give A Little

For a change, U.S. Treasury bond prices fell Friday, following a report that Timothy Geithner, the president of the New York Federal Reserve Bank, was expected to be tapped by President-elect Barack Obama as his Treaasury secretary. Stocks surged after the Geithner news and sapped the safe-haven bid for government debt.

The rise in equity prices indicates investors have confidence in Geithner, said Kim Rupert, managing director of global fixed income analysis at Action Economics in San Francisco.

Treasuries also suffered after remarks from President Jeffrey Lacker of the Federal Reserve Bank of Richmond, who said it was reasonable toe expect the U.S. economy to reverse its downward track next year, analysts said.

Some money seems to have flowed from Treasuries into the stock market on Friday, but investor wariness remains high and the decline could be temporary.

"We expect short-covering and dip buyers to enter the market," said Thomas di Galoma, head of government bond trading at Jefferies in New York.

Similarly, Kevin Giddis, head of fixed-income sales, trading and research at Memphis-based Morgan Keegan, said,"I belive this is profit-taking before the weekend and nothing more."

Despite bargain-hunting in beaten shares, investors remained on edge, fearful of a deep global recession and another credit freeze due to persistent woes in the banking and auto sectors. "The fundamentals are still weak and this should support the buying of the long-end," Giddis added.

President Charles Evans of the Chicago Fed said Friday after a speech to the Economic Club of Indiana in Indianapolis that the risks of deflation are higher now than five months ago but are still small. "The United States is undergoing disinflation, or a decline in the inflation rate," as a result of rising unemployment and falling commodity prices.

Traders also predicted investors will scoop up next week's record supply of two- and five-year notes. The Treasury will auction $36.0 billion in two-year debt on Monday, followed by $26.0 billion of five-year securities on Tuesday.

With fears slowly dissipating, investors pulled back from bonds Friday. The yield on the benchmark 10-year U.S. Treasury note rose to 3.21% late in the day from a 50-year low of 3.14% on Thursday. (See "U.S. Bonds Feed On Investor Fears.") It remains far below the 4.0% area at which it began the year.

But yields remain unusually depressed, and the 30-year bond inched down to 3.68%, from Thursday's 3.70%. The 30-year issue has not reached these levels since the 1960s, but, as the longest-dated Treasury bond, its movements are sometimes out of sync with the rest of the market. The yield on the two-year was at 1.09%, up from 1.02%.

Treasuries have been supported by worries about deflation and speculation that the Federal Reserve will cut rates below their current negligible levels to support the flagging economy. "The flight-to-quality move accelerated this week following a batch of weak U.S. economic data, which has increased the view that the economic downturn may be prolonged," said Minako Iida, a fixed-income strategist at Barclays Capital Japan. "Also, worries about deflation risks have emerged in the market, shifting from inflation concerns," she added.

Analysts said the flight-to-quality moves are likely to continue at least until the year-end, supporting the debt market.

The iShares Lehman 10-20 Year Treasury Bond (nyse: TLH - news - people ), which is an exchange-traded fund and a proxy for the longer end of the maturity spectrum, dropped 1.1%, or $1.27, to close at $111.72 Thursday, while the iShares Lehman 1-3 Year Treasury (nyse: SHY - news - people ) inched down 0.2%, or 14 cents, to $84.66.

Investors had a bit more appetite for risk, moving back into corporate bonds. The iShares IBoxx $ Invest Grade Corporate Bond Fund (nyse: LQD - news - people ) gained 1.4%, or $1.22, to $91.03, while its junkier counterpart, the iShares iBoxx $ High Yield Corpate Bond (nyse: HYG - news - people ) fund, added 1.0%, or 63 cents, to $64.03.

Reuters contributed to this article.