Treasurys Rally As Corporate Bonds Drop / Bonds

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From AP Reporter:

NEW YORK (AP) -- Treasury prices rallied sharply Friday as
investors turned defensive due to concerns about problems with
leveraged bank loans and weakness in the European banking system.
Government-backed bonds tend to come into favor when
investors are worried about the risks of other assets and financial
system problems.
On Friday, bonds rallied on concerns about German banks'
exposure to bad subprime assets, according to Action Economics.
There were reports that several large German banks will need capital
infusions to complete some upcoming mergers.
In addition, there was speculation that European firms have
been selling some of the bad subprime debt held in the complex asset
pools known as collateralized debt obligations, the economics firm
said. The liquidation of low-quality assets often intensifies demand
for safe assets.
The Treasury rally also was fed by heavy selling of
leveraged loans, according to Peter Boockvar, equity strategist at
Miller Tabak. Leveraged loans are given to companies that already
carry heavy debt loads and are more costly to borrowers than average
loans because of higher default risk.
Leveraged loans fueled the robust buyout wave that came to
an abrupt halt last year when the credit markets contracted. In
recent sessions, the leveraged loan market has been under pressure
and there has been speculation that funds are selling large amounts
of these poor-quality assets.
The benchmark 10-year Treasury note rose 30/32 to 98 25/32
Friday with a yield of 3.65 percent, down from 3.76 percent late Thursday according to to BGCantor Market Data.
The 30-year bond gained 1 3/32 to 99 2/32 with a yield of
4.43 percent, down from 4.53 percent late Thursday.
The 2-year note advanced 7/32 to 100 12/32 with a 1.93
percent yield, down from 2.06 percent.
After hours trade had no impact on yields. At 5:30 p.m.
Eastern time, the 10-year yield remained at 3.65 percent, the
30-year yield was still 4.43 percent and the 2-year yield stayed at
1.93 percent.
The yield on the 3-month note rose to 2.23 percent from 2.20
percent Thursday as the discount rate advanced to 2.18 percent from
2.15 percent.
Economic slowdown worries were also in the forefront Friday
and played a part in the rally. Overnight San Francisco Federal
Reserve President Janet Yellen said the first six months of 2008
will be "anemic," noting the severe contraction of the housing
market and related financial market turmoil. Yellen said the Fed
must be prepared to act to support the economy, although she also
said the country will likely avoid a recession.
The view that the economy is slowing was reinforced by
figures from the Commerce Department that suggested wholesalers have
too much inventory at a time when retail sales are stagnant. In
December inventories grew by 1.1 percent, the largest gain in a year
and a half, while wholesaler sales dropped by 0.7 percent.
Friday's rally undid the damage caused by a heavy sell-off
on Thursday. A wave of unusually nervous selling was set off after a
disappointing auction of $9 billion in new 30-year bonds. The sale
attracted few bids from foreign central banks and that worried
investors as there are concerns that a weaker dollar has diminished
global demand for U.S. debt. (This version CORRECTS Corrects year to 2008 sted 2007 in
12th graf.)