Treasurys Rally After Bear Stearns Deal

JPMorgan bought Bear Stearns for just $2 a share. A run on Bear Stearns late last week by panicky investors dealt a fatal blow to the brokerage's liquidity and forced the transaction.

The bond market overall was relieved by the emergency sale, which was supported by the Federal Reserve. Among other benefits, it will allow the Fed to control Bear Stearns' extensive bad mortgage debt and should put an end to Bear Stearns' penchant for creating high-risk debt instruments.

At the same time, investors are not convinced that the worst is over for bad mortgage debt or the financial markets. There are worries about the possibility of similar meltdowns at Lehman Brothers Holdings Inc. and other institutions with heavy exposure to subprime debt.

The continued anxiousness on Monday caused investors in Asia and Europe to sell stocks and stock up on government-backed Treasurys and other safer assets. Wall Street had a more complicated reaction, opening sharply lower but then regaining some ground.

The benchmark 10-year Treasury note rose 18/32 to 101 1/32 with a yield of 3.37 percent, down from 3.42 percent late Friday, according to BGCantor Market Data. Prices and yields move in opposite directions.

The 30-year long bond gained 12/32 to 101 4/32 with a yield of 4.30 percent, down from 4.35 percent late Friday.

The 2-year note advanced 5/32 to 101 8/32 with a yield of 1.35 percent, down from 1.43 percent. The 2-year yield has not been this weak since July 2003.

The Fed's actions over the weekend represented a significant expansion of its lending authority and were a radical departure from the central bank's typical stance of distancing itself from market affairs. The fact that the Fed felt compelled to take such drastic measures highlighted the extreme weakness and vulnerability of the financial markets. And the fact that the maneuver was so unusual helped stoke demand for low-risk investments.

On Sunday, the Fed also reduced the discount rate, which it uses to make loans to brokers by 0.25 percentage point to 3.25 percent. The Fed also offered to lend money to a long list of investment firms.

On Tuesday the central bank will hold a monetary policy meeting. Given the Fed's obvious willingness to step in on behalf of the markets, investors are confident the central bank will implement a large reduction in the overnight federal funds rate, which now stands at 3 percent.

Fed funds contracts on Monday showed that many investors expect a rate cut of one full percentage point, and a few even are placing bets on a massive 1.25 point reduction.

New data reports Monday pointed up the weakness in the economy. The New York Fed said local factory activity this month has fallen to a record low; the Empire State Manufacturing index had a reading of negative 22.2, down from negative 11.7 in February.

Meanwhile, the Federal Reserve said nationwide industrial production, which comprises production at factories, mines and utilities, dropped 0.5 percent in February, marking the first decrease in four months.