Long-dated Treasuries gain

Longer-dated US Treasuries gained in price on Tuesday, boosted by the Federal Reserve's bond purchase program and as investors still concerned about the European debt crisis used an earlier rise in yields as an opportunity to buy. The Fed bought $2.52 billion in bonds due between 2036 and 2041, out of $5.79 billion submitted for purchase. The central bank plans as much as $12.75 billion in additional purchases this week as part of its Operation Twist program.
Fears over Europe remained the dominant focus, however, with a resolution to the region's debt crisis still seemingly far away in spite of improvements in liquidity in the region. "There's still a lot of concern about Europe; the downgrades, how their auctions are going and the lack of resolution over there this deep into the game," said James Newman, head of Treasuries and Agency trading at Keefe, Bruyette and Woods in New York. Safe-haven buyers were attracted by a rise in yields earlier in the day as the weakest Chinese growth data in 2-1/2 years added to speculation that China will ease monetary policy.
Benchmark 10-year notes continued to test yield resistance at around 1.84 percent to 1.85 percent. If the note yields break below this level analysts see the debt as likely to continue to rally.
The rating agency also cut the EFSF bailout fund to the second-highest rating on Monday. But the EFSF drew solid demand for a 1.50 billion euro ($1.91 billion) sale of new six-month bills, despite the downgrade. Some investors fear that France's downgrade may make holding its debt less attractive to ratings-sensitive investors, including some central banks. Downgrades are also likely to increase haircuts on the region's debt when it is used to borrow from the European Central Bank's lending facility.
Investors are reluctant to take large positions as the European debt crisis remains unresolved, in spite of improved liquidity conditions since the ECB's 489 billion euro take-up of three-month loans in December. Short-term dollar funding costs continued to improve, though they remain much higher than a year ago. Three-month dollar Libor fell to 0.56230 percent, from 0.56490 on Monday. The rate had traded below 0.25 percent last July.