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By Rom Badilla, CFA – Bond Trader and BondSquawker

U.S. Treasuries rallied today as data suggests economic activity moderated in the first quarter and as stocks plunged.

Stocks declined as Federal prosecutors have opened up criminal investigations against Goldman Sachs.  Furthermore, the financial sector is under pressure as the U.S. Senate began debate on a reform bill, which could result in Wall Street spinning off it’s necessary derivative businesses.  Shares on Goldman Sachs dropped 9.4 percent and led the rest of the financial sector down.

The S&P 500 sold off 1.7 percent to an index level of 1186.68.  The VIX jumped almost 20 percent to 22.10 due to the sharp sell-off in the index.

The yield curve flattened as the long end outperformed in a flight-to-quality bid due to the massive drop in equities.  Both the 10-Year and Long Bond rallied today as the yield dropped 7 basis points to close at 3.66 and 4.53 percent.  The belly of the curve as indicated by the 5-Year tightened 6 basis points to 2.42 percent.  The yield on the 2-Year finished out the session at 0.96 percent, a drop of 4 basis points.

10-Year Treasury Yield – Intraday Chart

Corporate spreads widened today as risk aversion spread throughout the market.  Markit’s 5-Year Credit Default Swap Investment Grade Corporate Index (aka CDX.IG.14) widened by almost 3 basis points today to a spread of 92 basis points.  The index represents CDS on 125 corporate entities while the spread represents the cost associated with owning protection in case of default.

Greece draws closer to rescue aid supported by both the IMF and the EU as they negotiate conditions to reign in spending as well as terms of the package.  Despite the fact that an EU official said that they expect details to be released by late Sunday, there appears to be a few road bumps as Germany is debating on their share of aid beyond 2010.

Greek bonds were generally better today as optimism grows that a deal can be reached.  2-Year yields on Greek debt dropped 17 basis points to 12.72 percent while the yield on the 10-Year closed at 8.96 percent to 7 basis points.  The yield on the 5-Year increased 9 basis points to 10.62 percent according to Bloomberg data.

Greece Yield Curve 1-Day Change

Portugal bonds followed suit as yields tightened across the curve. 2-Year yields declined 45 basis points to 3.82 percent while the yield on the 5-Year moved to to 4.75 percent, a drop of 28 basis points.  The 10-Year closed at 5.14 percent, a tightening of 34 basis points.

The Dollar Index declined 0.2 percent to end the week at 81.902.  The Euro advanced to 1.3294, a gain of 0.5 percent.