Treasurys fall as worries about Europe ease, Fed says interest rates will remain low

Wednesday, April 28, 2010

Treasurys fall as concerns about Europe ease

NEW YORK — Interest rates rose in the Treasury market Wednesday as fears about a European financial crisis subsided. Investors also were reassured when the Federal Reserve forecast that interest rates will remain stable “for an extended period.”

Investors appeared to take in stride news that Standard & Poor’s had downgraded its rating of Spain’s government debt. The downgrade came a day after S&P lowered Greece’s rating to junk status, and also cut its rating on Portugal’s debt.

Greece’s situation took a turn for the better after German Chancellor Angela Merkel said her country would speed up the approval process for a bailout package for the country. That raised hopes that Greece would have enough money to pay back loans that are due on May 19.

Worries that Greece might default intensified Tuesday, especially after S&P downgraded the country’s debt. A default would hurt the euro, the currency shared by 16 European nations, and would threaten the economic recovery on the continent and other countries. Greece’s neighbors including Germany hold billions of dollars in Greek debt, and would lose that money if Greece were to default.

The yield on the 10-year Treasury note, a benchmark for many consumer loans, rose to 3.77 percent Wednesday from 3.69 percent on Tuesday. Its price fell 65.625 cents to $98.8125.

Yields on Treasury bonds and notes move in the opposite direction from their price. The 10-year note’s yield plunged and its price soared Tuesday in response to the developments in Europe.

S&P cut Spain’s credit rating by one notch Wednesday, to AA from AA+, because it expects the country will experience an “extended” period of subdued economic growth. That could make it harder for the country to repay its debt.

Meanwhile, the Fed gave bond investors the news they wanted to hear, that it expects its benchmark federal funds rate to remain in a range between zero and 0.25 percent “for an extended period.”

The central bank’s policy-making Open Market Committee ended a two-day meeting with a decision to keep rates stable and an upbeat economic assessment. The Fed said household spending is up, but companies remain reluctant to hire.

It also said inflation is likely to remain subdued for some time. Inflation is a great concern for bond investors on two levels. First, the Fed is likely to raise rates if it sees signs of rising inflation. Second, inflation erodes the value of long-term bonds over time.

An auction of 5-year Treasury notes met with lukewarm demand. The Treasury Department sold $42 billion in notes. The bid-to-cover ratio, or the number of bids accepted compared with those received, was 2.75.

In other trading, the yield on the 2-year note that matures in March 2012 fell to 1.04 percent from 1.07 percent. Its price fell 6.25 cents to $99.90625.

The yield on 30-year bond that matures in February 2040 rose to 4.63 percent from 4.58 percent. Its price fell 84.375 cents to $99.9375.

The yield on the 3-month T-bill that matures July 29 rose to 0.15 percent from 0.14 percent. Its discount rate was 0.16 percent.

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