Economic Jitters Hitting Treasury Market?

July 16, 2008— -- A stumbling economy and a potential federal bailout of home mortgage giants Fannie Mae and Freddie Mac appear to have prompted some traders to try to profit by questioning what has been one of the most stable investments: U.S. Treasury bonds.

As first reported by The Wall Street Journal, certain types of derivatives trades that profit from the perception of instability in the bond market have increased. Last week, the price of protection against a government default on a 10-year Treasury note doubled.

"There are some cracks in the confidence in the United States and the financial markets," said T.J. Marta, an analyst at RBC Capital Markets.

But analysts and financial advisers told ABC News that Treasury bonds remain a safe, stable investment.

The price of the benchmark 10-year bond note rose Tuesday after Federal Reserve Chairman Ben Bernanke's grim assessment of the state of the economy, sending the bond yield down to 3.83 percent. Bond prices and yields move in opposite directions.

The price rise fits with the typical trend in a down economy: As consumers become nervous about equity markets, they tend to move toward low-risk investments such as Treasury bonds, which are backed by the federal government.

"When the sky is falling, people still run to Treasuries," said Gary Schatsky, a financial adviser and head of ObjectiveAdvice.com.

The potential to profit from the perception that the United States could default on its bond stems from worry that the government may take on trillions of dollars of debt from Fannie Mae and Freddie Mac, the struggling mortgage giants.

The Treasury department has offered to buy equity in the two companies, if necessary. The plan also includes a proposal to have the Federal Reserve help to regulate Fannie and Freddie.

Treasury Secretary Henry Paulson emphasized in congressional testimony Tuesday that the Treasury Department had no immediate plans to lend money to or buy equity in Fannie and Freddie.

Stocks in the two companies, which were originally set up by the government to buy mortgages, have been hammered with each losing 80 percent of their value.

Whatever jitters the Treasury plan may have caused among institutional investors apparently have not trickled down to individual investors.