Traders wait to see if Fed will buy more bonds; 10-year Treasury yield at 2.71 percent

Monday, September 20, 2010

Treasurys up as bond market looks to Fed meeting

NEW YORK — Treasurys gained ground on Monday as traders looked toward an upcoming meeting of the Federal Reserve.

Speculation has been building that the Fed could announce a plan to buy more Treasurys after its meeting on Tuesday. The aim would be to spur lending by lowering long-term interest rates.

If the Fed hopes to jumpstart economic growth, lowering long-term rates is about the only weapon left in the Fed’s arsenal, said Kevin Giddis, president of fixed-income capital markets at Morgan Keegan. The Fed has kept short-term rates at a range of zero to 0.25 percent since Dec. 2008, ensuring cheap borrowing rates for banks, but not more lending.

The 10-year note gained 31.25 cents on Monday, rising to $99.28. The price increase lowered the yield to 2.70 percent. The 2-year note was trading flat at $99.81 with a 0.47 percent yield.

At the Fed’s last meeting on Aug. 10, the Fed launched an effort to tamp down rates without adding to the total amount of debt on its balance sheet. It has been replacing mortgage bonds with Treasurys after the mortgage bonds expire. As part of that plan, the central bank announced on Monday that it bought $5.19 billion in Treasurys coming due between 2016 and 2020.

Giddis said bond traders also think the Fed could use the mortgage-bond cash to target just longer-dated Treasurys, perhaps those maturing 2020 and later. “That would make a stronger statement,” he said.

In other Treasury market trading, the 30-year long bond rose 53.1 cents to $100, with a 3.87 percent yield. The yield on the three-month T-bill was 0.15 percent, with a discount of 0.16 percent.

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