By Richard Leong
NEW YORK (Reuters) - Long-dated U.S. government debt prices rose on Monday, as the stock market slipped ahead of a Federal Reserve meeting that is widely expected to send key short-term interest rates to record lows.
The urgency for the Fed to take more bold steps intensified in the wake of fresh data showing plunging prices and a manufacturing contraction led by the woeful auto sector, factors that were weighing on stocks.
The latest evidence of deflation, which can tip a weak economy into a downward spiral, was the record decline in the prices paid index in the New York Fed's "Empire State" manufacturing report.
The poor economy had investors eager for safe havens.
In fact, the one-month Treasury bill rate briefly traded below zero percent, suggesting investors were willing to suffer small losses as long as they believed their holdings were shielded from the harsh financial climate.
"The prices paid component continues to collapse. This is putting some bids into the long end of the curve," said Lou Brien, market strategist with DRW Trading in Chicago, of the New York Fed report.
Moreover, government data showed a fall in factory output in November, pointing to further erosion in U.S. manufacturing.
Worries of a deep, protracted U.S. recession which should keep long-term borrowing costs low for a sustained period bolstered demand for long-maturity Treasuries.
Prices on 10-year Treasury notes were up 10/32 at 110-18/32. Their yield, which moves inversely to price, was 2.54 percent, down from 2.57 percent late on Friday.
The major U.S. stock indexes were down sharply in early trading. For more, see <.N>
FED UNDER PRESSURE
Given the grim economic outlook, U.S. central bankers are under tremendous pressure to ease monetary policy further to stem deflation and bring the United States out of recession, analysts said.
The Fed is widely expected to pare the benchmark federal funds target rate by at least half a percentage point to 0.50 percent, the lowest on records dating to July 1954.
With short-term market rates already reflecting a Fed move to cut rates to rock bottom levels, traders increased bullish bets on long-dated Treasuries to capture higher yields through so called curve-flattening trades.
The spread between two-year and 10-year notes narrowed to 174 basis points from 180 basis points late Friday.
Among other maturities, five-year Treasuries were down 2/32 for a yield of 1.53 percent and the 30-year bond was up 23/32 to yield 3.01 percent, down from 3.05 percent late Friday.
(Reporting by Richard Leong; Editing by Andrea Ricci)
