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AP
Treasurys Rise After Jobless Claim Jump
Thursday December 20, 11:13 am ET
By Leslie Wines, AP Business Writer
Treasurys Rise After Jobless Claims Jump, MBIA Discloses CDO Exposure
NEW YORK (AP) -- Treasury prices rose once more Thursday after a new jobless claims report pointed to tough times ahead for the economy.
Treasurys are viewed as among the safest assets and tend to perform well when the economy is in danger.
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The Labor Department reported that initial claims rose 12,000 to 346,000 in the latest week. The four-week moving average of claims, which economists consider a good barometer of the economy, rose 23,000 to 2.63 million, marking the highest level in almost two years.
"The combination of falling consumer confidence and rising jobless claims is a terrible one for the economy," said Tony Crescenzi, fixed-income analyst at Miller Tabak. "The expansion will end if this continues."
The move to safety in Treasurys also was spurred by yet another troubling development with a bond insurer.
The cost of buying protection against a default for bond insurer MBIA Inc. shot up a full point Thursday after the company said it guaranteed $8.1 billion in collateralized debt obligation market. Collateralized debt obligations, or CDOs, are investment pools that contain some assets backed by subprime mortgages.
Traditionally bond insurers did not provide backing for CDOs, which are among the riskiest debt instruments because of their subprime exposure.
The disclosure from MBIA came a day after a Standard & Poor's rating agency slashed its credit rating for bond insurer ACA Financial Guaranty Corp. to a non-investment grade "CCC" from investment grade "A." S&P said ACA's capital cushion of $650 million is still $2.2 billion short of what it needs to cover potential losses.
In Thursday trading, the benchmark 10-year Treasury note rose 5/32 to 101 27/32 with a yield of 4.02 percent, down from 4.03 percent late Wednesday. Prices and yields move in opposite directions.
The 30-year long bond rose 31/32 to 109 9/32 with a yield of 4.43 percent, down from 4.47 percent late Wednesday.
The 2-year note was unchanged at 100 2/32 with a yield of 3.09 percent, down from 3.10 percent late Wednesday.
The jobless claims news eclipsed a Commerce Department that the economy, as measured by gross domestic product, grew at a 4.9 percent pace in the third quarter, unchanged from a prior estimate.
Analysts believe the strength seen last summer already has eroded in the face of recent problems in the credit markets and gains in inflation. Many analysts expect fourth-quarter growth to be just in the 1 percent to 1.5 percent range.
"GDP growth is a distant memory," said Bernard Baumohl of the Economic Outlook Group. "Inflation and joblessness are on the rise."
The Commerce Department report also showed that the core personal consumption expenditure price index, an inflation gauge carefully monitored by the Federal Reserve, rose at a 2 percent clip in the last quarter. The previous report showed only a 1.8 percent advance. The Fed's "comfort zone" for inflation increases is 1 percent to 2 percent.
The bond market monitors inflation carefully because it eats into the value of fixed income. In addition, if the Fed becomes excessively worried about inflation it will be more cautious about reducing rates.
The Fed has cut interest rates a full percentage point in recent months, pushing the Fed funds target down to 4.25 percent. Investors are hoping for more cuts in 2008 to grease financial markets and consumer spending.
The day's top corporate news stories revealed more fallout from the subprime mortgage crisis. Persistent worries about subprime problems have helped fuel intense demand for Treasurys since August.
Bear Stearns Cos. said a bigger-than-expected writedown in its mortgage portfolio caused the nation's fifth-largest U.S. investment bank to post the first loss in its 84-year history. It took a $1.9 billion writedown in the recent quarter when its mortgage-backed securities continued to lose value.
And the Federal Reserve said that in the latest week, the total amount of commercial paper outstanding fell by $54.7 billion, the largest weekly decline since late August. The outstanding volume in the risky asset-backed sector contracted by $27.5 billion.
The commercial paper market, normally highly liquid, began contracting sharply in August due to concerns that some of these short-term notes are backed by below-prime mortgages. Commercial paper usually provides an easy way for companies to get short-term operating capital while avoiding formalities such as registering bond sales with the government.
