Bonds rise on persistent Fed rate cut bets

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NEW YORK, Oct 19 (Reuters) U.S. government bond prices rose on Friday as bond investors continued to bet that credit market strains and a decelerating economy would prompt the Federal Reserve to cut interest rates soon.

The benchmark 10-year Treasury note's yield briefly dipped to fresh one month lows around 4.46 percent and has fallen more than 20 basis points this week as housing and data on initial jobless claims has confirmed investors gloomier economic view.

''Everything leads back to the Fed,'' said Doug Roberts, chief investment strategist with Channel Capital Research in Shrewsbury, New Jersey. ''Even if they don't cut rates this month, the sentiment continues that they will cut rates fairly shortly. The Treasury market continues to rally,'' he said.

U.S. interest rate futures now show a roughly 70 percent perceived chance of the Fed cutting its fed funds target rate by 25 basis points to 4.50 percent at its meeting on Oct. 30-31, up from around 30 to 40 percent chances earlier this week.

The benchmark 10-year note's price rose 4/32 for a yield of 4.48 percent, compared with 4.50 percent late on Thursday. Bond yields and prices move inversely.

Economic data including higher than forecast weekly U.S. jobless claims released on Thursday have accelerated expectations for a Fed rate cut soon.

''The market is just seeing the (economic) weakness,'' said Roberts. ''The big catalyst seems to be the spill over, at least temporarily, into unemployment numbers and the core CPI was on target,'' he said, adding that weak bank earnings are underscoring concerns that the economy's problems are adversely affecting the financial sector, driving more of a flight to safety bid into Treasuries.

On Thursday, an earnings miss from Bank of America added to evidence of the hit to financial institutions from the abrupt ending of the credit boom.

Early on Friday, U.S. equity futures slipped on worries about the impact of tight credit conditions on financial services companies.

With a dearth of data this session, the focus was expected to be on weaker U.S. equities and the reminder that on Oct. 19, 1987, investors endured a record percentage fall in the Dow Jones Industrial Average index on what became known as ''Black Monday''.

The two-year note, which responds closely to expectations for central bank interest rate moves, traded unchanged in price for a yield of 3.92 percent, versus 3.92 percent late on Thursday.

Riskier asset markets are a persistent focus for Treasury bond investors and any escalation of turmoil in those sectors could redouble the bid into highly rated U.S. government bonds, analysts warn.

''Turbulence continues as rumors and noise circulate from the sub-prime, ABX and SIV worlds. The big fear is the latest round of downgrades will result in liquidations in the mortgage ABS space, which will pressure all credit markets,'' wrote T.J.

Marta, fixed income strategist with Royal Bank of Canada Capital Markets in New York in a daily research note.

However, Marta added: ''This credit trade is different than the summer's trade in that Libor has actually been coming in, which should prove a net positive for spreads.'' Reuters MP VC1905

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