By Daniel Kruger
Aug. 15 (Bloomberg) -- U.S. short-term Treasury securities rallied, led by the biggest gain in three-month bills since 1989, as investors sought shelter in the safest assets on concern that companies are having trouble raising funds.
Two-year notes rallied as traders stepped up bets the Federal Reserve will cut borrowing costs. Merrill Lynch & Co. lowered its rating on Countrywide Financial Corp., the biggest U.S. mortgage lender, to "sell'' today and raised the possibility of bankruptcy. Sydney-based Basis Capital Fund Management Ltd. said losses at one of its hedge funds may exceed 80 percent. A report showing slowing inflation also boosted debt.
``As long as other markets remain dysfunctional the bid will remain in Treasuries,'' said William O'Donnell, U.S. government bond strategist at UBS Securities in Stamford, Connecticut, one of 21 firms known as primary dealers, which trade with the Fed.
Ten-year notes yielded as little as 2.23 percentage points above 10-year inflation-linked Treasuries yesterday, a two-year low as investors are less concerned about the prospects of accelerating prices. The difference (Tip Spread) represents investors' expectations for inflation over the life of the securities.
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