Investors flock to Treasuries as market concerns deepen

2-year Treasury notes have posted their biggest gains in more than five years. Deepening concerns about housing and credit-market losses sent investors flocking to the safety of Treasury bonds. The yield on the 2-year note dipped to 3.78% while the yield on the 10-year fell to 4.39%. The price action left the yield curve, as measured by the 10y/2y term spread, at 61 bps. As a new week began, some of the gains were deemed to have occurred too far too fast, resulting in Treasury prices paring back some of their significant gains and a modest rise in yields.

With the FOMC’s next policy meeting due Wednesday, the market is pricing in the rising odds of additional rate cuts this year. As gauged by the Fed funds futures strip, the odds of a 25 bps cut at the October 31 meeting jumped to 86% compared to just 32% one week prior. Looking to December, the bond market is pricing in an additional 25 bps cut with a 69% probability compared with just 12% the prior week. WMR economist Thomas Berner forecasts two 25 bps rate cuts this year. Kathleen Mcnamara, an analyst at UBS anticipates yields will drift higher with the 10-year Treasury yielding 4.9% in six months and 5.2% in 12 months.