Interest rates mixed after Fed official affirms plans to keep rates low, 30-year TIPS sale

Interest rates mixed after Fed official talks

CHARLOTTE, N.C. — Short-term interest rates inched lower in the bond market Monday after a Federal Reserve official reiterated that record-low interest rates are still needed to help the economy.

Rates rose and bond prices fell as Federal Reserve Bank of San Francisco president Janet Yellen became the latest Fed official to stress that the central bank isn’t in any rush to boost borrowing costs for millions of Americans. The remarks come after the Fed took a surprise step Thursday and bumped up the discount rate, the interest banks pay for emergency loans.

On Monday, stocks ended the session with a modest loss after big consumer companies gave a cautious outlook for economic growth.

Short-term rates are often dictated by the federal funds rate, which currently sits in a range between zero and 0.25 percent. If the Fed follows through with keeping rates low, then there should be no pressure to send short-term market rates higher.

The yield on the two-year note that matures in January 2012 fell to 0.89 percent late Monday from 0.93 percent late Friday and its price rose 2/32 at 99 31/32. Yield and price move in opposite directions.

“There wasn’t a lot of activity, it was a very quiet day, today,” said John Spinello, a bond strategist at Jefferies & Co.

However, as the economy grows, inflation could become a problem in the future, affecting long-term interest rates, Spinello said. Inflation is one of the biggest concerns for bond traders because it eats into the value of the fixed returns on bonds over time.

The yield on the 10-year Treasury note maturing in February 2020, which is a basis for rates on mortgages and other consumer loans, rose to 3.80 percent from 3.78 percent. Its price fell 5/32 to 98 18/32.

Meanwhile, longer-term Treasury prices fell after a Treasury Department auction of $8 billion in 30-year Treasury inflation protected securities, or TIPS, drew weaker demand than an auction for 10-year TIPS last month. Prices often fall as new supply is added to the market.

“It was a test of 30-year TIPS, and it was bid rather cautiously,” Spinello said.

The yield on the 30-year bond that matures in February 2040 rose to 4.73 percent from 4.71 percent. The price fell 13/32 to 98 9/32.

The 30-year TIPS auction will be followed by a $44 billion sale of two-year notes Tuesday, a $42 billion offering of five-year notes Wednesday and a $32 billion sale of seven-year notes Thursday.

Spinello said he expects the two-year notes to sell well, while the seven-year notes have more of a “negative bias,” and those results are uncertain.

In other trading, the yield on the three-month T-bill that matures May 27 was unchanged from 0.09 percent. Its discount rate was 0.09 percent.