Treasurys end mixed amid credit fears

NEW YORK (AP) - Treasury prices closed mixed Wednesday as deepening fears about mortgage-linked assets spurred strong buying of shorter maturities.

Government-backed bonds generally perform well in times of financial crisis. Wednesday's fear was fueled by notes from analysts at Deutsche Bank and Foxx-Pitt Kelton predicting Morgan Stanley will take billions of dollars in new losses on mortgage-linked assets, according to Tom di Galoma, head of Treasury trading at Jefferies & Co.

"The market is being driven by worries about more headline risk," he said.

The worries about subprime contagion were reinforced after a Moody's Investors Service decision downgraded or placed on a watch list for possible downgrade $33 billion in holdings in structured investment vehicles, including several affiliated with Citigroup Inc. SIVs are off-balance sheet entities, some of which are ailing because they invested heavily in below-prime mortgages.

Since credit markets tightened up last August, Treasurys have been one of the few fixed-income assets to attract strong demand as investors have moved away from risky instruments.

Corporate debt markets improved significantly in October, but are under pressure once again this month after mortgage-related turmoil led to the departures of the top executives at Citigroup and Merrill Lynch & Co.

Bonds of banks and brokerages have been hit hardest, and investors in the credit default swap market this week are hedging more heavily against a default on those bonds.

A credit default swap amounts to an insurance policy against a bond default. The costs of buying those contracts rose sharply Wednesday for debt of Citigroup, Wachovia Corp., Morgan Stanley, Wachovia Corp., Washington Mutual Inc., Capital One Financial Corp. and Countrywide Financial Corp., according to derivatives broker Phoenix Partners Group.

Wednesday's price gains were limited by some surprisingly strong Commerce Department data on wholesale sales, which rose 1.3 percent in September, and inventories, which were up 0.8 percent. The figures were above analysts' expectations. Evidence of economic strength weakens demand for low-risk assets.

In addition, the Labor Department said third-quarter productivity increased 4.9 percent. The gain was the biggest in four years and outpaced analysts' expectations.

The benchmark 10-year Treasury note rose 10/32 to close at 103 8/32 with a yield of 4.34 percent, down from 4.38 percent in late trade Tuesday. Prices and yields move in opposite directions.

The 30-year long bond fell 11/32 to 105 7/32 with a yield of 4.67 percent, matching its late Tuesday level.

The 2-year note rose 7/32 to 100 232 with a 3.59 percent yield, down from 3.70 percent late Tuesday.

The yield on the 3-month note fell to 3.48 percent from 3.75 percent Tuesday as the discount rate dropped to 3.40 percent from 3.65 percent.

An afternoon auction of $13 billion in 10-year notes was well-received, but had little impact on trade. The auction attracted strong demand from both foreign and U.S. buyers.

The Treasury market also is being buffeted this week by a mercurial stock market. On Wednesday stocks staged a massive sell-off after the dollar sank to new lows against the euro amid speculation that China will seek to diversify some of its foreign currency stockpiles beyond the greenback.

Unease about the dollar dogged stock markets worldwide and, in the U.S., came a day after stocks finished with a sizable gain.