Bonds Get Boost From Safe-Haven Bid

Treasury debt prices rose on Wednesday as worries over the potential effectiveness of a government rescue plan for the financial industry bolstered the safe-haven appeal of government debt.

Gains were limited however by concerns over pending debt supply ahead of a record-large monthly offering of benchmark notes.

Investors bought up lower-risk assets in disappointment over the Treasury's financial rescue plan as laid out by Treasury Secretary Timothy Geithner on Tuesday. Geithner testified before Congress again on Wednesday.

Treasurys were also bolstered as stocks of financial companies pared their early gains.

"Bonds are catching a bid as financials are faltering," said Andrew Brenner, senior vice president at MF Global in New York, adding "the longer (Geithner) talks the better bid for bonds."

Benchmark 10-year notes were trading 10/32 higher in price for a yield of 2.77 percent, from 2.81 percent late on Tuesday, while two-year notes were unchanged in price for a yield of 0.90 percent.

The safe-haven appeal of Treasurys was capped however by nervousness over a $21 billion auction of 10-year notes on Wednesday afternoon. The auction is part of the Treasury's $67 billion quarterly refunding, and is seen as a true test of investor appetite for U.S. government securities in expectations of soaring debt issuance.

An auction of $32 billion of three-year notes on Tuesday met robust demand, but the shorter-term notes were seen as more appealing to investors, who are nervous the 10-year note auction may not go so well.

"The disappointment (over Geithner's plan) and a strong three-year note auction have sparked demand for Treasurys," said John Canavan, market analyst at Stone & McCarthy Research Associates in Princeton, N.J.

Government debt is expected to soar to $1.5 trillion to $2.5 trillion in fiscal 2009, and investors are skeptical the market will be able to digest all of the new debt issuance.

The government is auctioning a whopping total of $187 billion of bills and Treasury notes this week.

Treasury Secretary Geithner was testifying for a second day before Congress on Wednesday. The government's rescue plans for the economy and the financial industry were met largely with disappointment on Tuesday, and stocks plunged while Treasurys rallied.

Data early on Wednesday showed demand for mortgage applications fell nearly 25 percent last week, the Mortgage Bankers Association said, as potential home buyers held out for better terms and possible government help.

Also, the Commerce Department said the trade deficit shrank 4 percent in December to $39.9 billion, marking the smallest trade gap since February 2003.

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