Treasury prices jump after Fed announces stimulus plans to buy government debt again

Treasury prices jump on Fed stimulus plans

NEW YORK — Treasury prices jumped Tuesday after the Federal Reserve said it will buy a small amount of government debt in a move to stimulate the economy.

The move would reduce the amount of Treasury securities in the market and could help nudge down long-term rates on mortgages and corporate debt. The Fed’s hope is that its purchases will help stimulate lending and lead to job creation.

The price of the 10-year note climbed 6.25 cents to $106.25, while its yield sank to 2.77 percent from 2.83 percent late Monday. Earlier in the session, the yield slid to 2.75, its lowest point since March 2009, when the markets were beginning to recover from the financial crisis.

The Fed said economic growth will be “more modest” than it had thought just seven weeks ago. As expected, the central bank said it would keep its target for its key federal funds rate at zero to 0.25 percent for a “extended period.”

By restarting stimulus programs on a small scale, the Fed placated investors who have grown increasingly anxious as economic reports have shown that the recovery is slowing. But the stock market rebounded only partially after the announcement because investors recognized that the Fed’s moves are quite small and unlikely to have a major impact on the recovery.

“Markets are now evaluating the Fed’s assessment of the recovery, as well as the fact that monetary stimulus hasn’t done that much so far and might not be as constructive as hoped,” said John Spinello, bond strategist at Jefferies & Co.

The purchases of debt the Fed plans are known as “quantitative easing.” Economists estimate that the Fed will have about $10 billion a month to buy the debt. That is a small amount of money compared to the economy’s needs.

The Fed said it would use the proceeds it earns on mortgage bonds to buy two-year and 10-year Treasurys, and that it would buy an equal amount of government debt as existing bonds mature. The net effect is to keep its $2.3 trillion balance sheet steady, while shifting its holdings into more government debt.

In 2009 and early 2010, the Fed bought $1.25 trillion in mortgage securities, $175 billion in mortgage debt from Fannie Mae and Freddie Mac, and $300 billion in government debt. In March, the Fed stopped buying new mortgage securities and Fannie and Freddie debt because the economy was clearly recovering.

In other trading Tuesday, the yield on the Treasury’s two-year note fell to 0.53 percent from 0.55 percent. Its price edged up 3.125 cents to $100.188.

The yield on the 30-year bond slipped to 4.01 percent from 4.02 percent, while its price rose 28.13 cents to $106.375.

The yield on the three-month Treasury bill was unchanged at 0.14 percent. Its discount rate was 0.15 percent.