Treasurys Rally As Stocks Cave In

NEW YORK — Treasury prices rallied Friday, benefiting from a sharp decline in equity markets as investors reacted to weak economic reports and disappointing corporate earnings. The stock selloff sent the Dow Jones industrial average down more than 300 points.

In general, government bonds, perceived as being among the safest investments, show strength when investors grow worried about risk and sell stocks. That was the case Friday after disappointing earnings from American International Group Inc. and Dell Inc. underscored the tough economic environment in which companies now operate.

In addition, the Commerce Department reported that personal spending, on an inflation-adjusted basis, was unchanged in January. That could lead to the faltering of a major engine of the nation's economic growth.

A closely watched gauge of consumer inflation posted a 0.4 percent increase in January and was up 3.7 percent over the past 12 months, the biggest year-over-year gain since 1991. This result will intensify worries that inflation is accelerating even as the economy slows.

Ian Shepherdson, chief U.S. economist at High Frequency Economics, predicted that spending will decline in coming months.

"We expect spending will soon fall," he said. "Real incomes are slowing, asset prices are falling and credit is harder to find. A dangerous mix."

The benchmark 10-year benchmark advanced 1 4/32 to 99 26/3 with a yield of 3.52 percent, down from 3.67 percent late Thursday, according to BGCantor Market Data. Prices and yields move in opposite directions.

The 30-year long bond gained 1 9/32 to 99 11/32 with a yield of 4.42 percent, down from 4.52 percent late Thursday.

The 2-year note rose 11/32 to 100 23/32 with a 1.64 percent yield, down from 1.82 percent.

The yield on the 3-month note fell to 1.85 percent from 1.91 percent as the discount rate dropped to 1.81 percent from 1.87 percent.

In late trading, as of 5:30 p.m. Eastern time, the 2-year yield slipped to 1.63 percent, the 10-year yield moved up to 3.53 percent, and the 30-year yield rose to 4.43 percent.

The 1.63 percent yield is the weakest level for the 2-year note in almost four years. The 2-year yield is the most sensitive to interest rate policy concerns, and the fact that investors have been pushing it lower indicates the market expects more heavy rate cuts from the Federal Reserve soon.

The Fed funds target now stands at 3 percent and market players are expecting at least a 0.50 percentage point reduction on or before the Fed's March 18 monetary policy meeting.

Other data reports Friday also pointed to a sagging economy. The Chicago purchasing managers index, which measures regional manufacturing activity, plunged to 44.5 this month from 51.5 in January. Readings below 50 indicate contraction.

And a University of Michigan index showed that the economy's problems are weighing on the consumer. Sentiment this month fell to 70.8 from 78.4 in January.

(This version CORRECTS UPDATES trading. SUBS 5th graf to correct economist's name to "Ian Shepherdson" sted "Hugh Sherpherdson," corrects Thursday yield of 2-year note to 1.82 percent.)

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