Treasurys close mixed in erratic day

Long-term Treasury prices closed mixed on Friday after an uneven session largely spent reacting to the stock market.

Long-term Treasury prices reversed course several times Friday, moving lower as the stock market powered ahead, then rising at points when the equities rally seemed to falter. Low-risk Treasurys often are in demand when stocks seem too risky to investors. But on Friday stocks were more in favor, although trade was choppy in both markets.

Bond investors remain focussed on worries that the rising defaults on home loans and other credit problems will weaken the broader economy.

By contrast, stocks rallied Friday after home lender Countrywide Financial delivered an upbeat outlook. That news suggested to some that a turning point might be near for the ailing mortgage industry, which would help stabilize the housing and consumer sectors.

"I'm not sure the bond guys believed the reasoning in the stock market," said Kim Rupert, managing director of fixed income at Action Economics. "Every time prices dipped lower, bargain hunters stepped in and picked up a little extra insurance."

The benchmark 10-year Treasury note fell 4/32 to 102 27/32 with a yield of 4.39 percent, up from 4.38 percent at Thursday's close. Prices and yields move in opposite directions.

The 30-year long bond dropped 6/32 to 105 with a 4.69 percent yield, little changed from Thursday's close.

There was demand for short-term notes. The 2-year note rose 4/32 to 99 24/32 with a 3.76 percent yield, down from 3.78 percent at its Thursday close.

After hours selling sent the 10-year yield up to 4.41 percent at 5:30 p.m. from 4.39 percent at the official close, while the 30-year yield remained at 4.69 percent. Sales of the 2-year note pushed its yield up to 3.77 percent from 3.76 percent.

The yield on the 3-month note rose to 3.94 percent from 3.92 percent Thursday as the discount rate rose to 3.84 percent from 3.82 percent.

The bond market drew some strength from a poll that showed weakening consumer sentiment. The University of Michigan's consumer sentiment survey dropped to 80.9 in late October from 83.4 in September. The latest reading was below economists' forecasts and marked the weakest level since May 2006.

"The data imply that financial market turmoil and negative news headlines are continuing to weigh on sentiment," said Action Economics. Lower sentiment could lead to lower spending and dampen the overall economy.

Signs of future economic malaise increase the odds that the Federal Reserve will cut rates again at its meeting next week. Pricing of Federal funds futures contracts Friday indicated the bond market expects the Federal Reserve to drop the Fed funds rate by a quarter percentage point to 4.50 percent at its meeting next week.

The Fed last month put in place an unusual half percentage point decrease that was cheered by both the stock and bond markets.

Fed officials have said data reports will play an important role in monetary policy decisions. Many recent economic and corporate earnings reports have emphasized the damage done to banks and homeowners by last summer's severe credit contraction.