U.S. government debt securities erased declines sparked by a Labor Department report showing the economy created more jobs in October than economists forecast. Shares of financial- services companies including Merrill Lynch & Co. fell to a two- year low as analysts predicted the housing slump will cause banks to lose more money.
``Problems in the financial market and housing market will eventually show up in the real economy,'' said Robert Calhoun, who oversees about $50 billion as chief investment officer in Richmond, Virginia, at Tattersall Advisory Group. The longer the Federal Reserve waits to lower interest rates further, ``the more severe the eventual impact will be.''
Yields on two-year notes, more sensitive than longer- maturity debt to changes in interest rates, fell 8 basis points, or 0.08 percentage point, to 3.67 percent at 4:29 p.m. in New York, according to bond broker Cantor Fitzgerald LP. The yield earlier touched 3.62 percent, the lowest since July 2005. The price of 3 5/8 percent securities maturing in October 2009 rose 5/32, or $1.56 per $1,000 face amount, to 99 29/32.
Traders increased bets on a quarter-percentage-point cut in the Fed's target for the overnight lending rate between banks at policy makers' next meeting on Dec. 11, interest-rate futures show. The implied probability of a cut rose to 70 percent from 60 percent, based on the prices of federal funds futures listed on the Chicago Board of Trade.
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