Long Treasuries lead bond rally on Fed plan

NEW YORK: Long-dated US government debt rallied strongly on Thursday, extending the previous day's rally on a Federal Reserve plan to invest $400 billion in long-term Treasury securities.

In a plan designed to cut the cost of mortgages, corporate bonds, and other kinds of credit, the Fed will buy long-term federal debt over the next nine months, raising money for the purchases by selling holdings of short-term debt.

The strategy of buying longer-dated Treasuries at the expense of shorter ones pushed the price of 10- and 30-year Treasuries securities sharply higher, shrinking the difference between short- and long-term yields.

Benchmark 10-year notes rose a point, their yields falling to 1.76 percent from 1.87 percent late on Wednesday.

The 30-year bond climbed 3-4/32, its yield falling to 2.84 percent - the lowest since January 2009 - from 2.99 percent late on Wednesday.

The difference between 2- and 10-year yields stood at 157 basis points on Thursday, down sharply from 204 basis points a month ago when markets gradually began to anticipate further monetary easing.

"The Fed is buying a lot more long bonds than we thought," said Steve Van Order, fixed income strategist with Bethesda, Md.-based Calvert Investment Management Inc, which has more than $14.5 billion in assets under management.

A significant chunk of purchases -- 29 percent -- will take place in the 20- to 30-year area.

"If you were a long-bond trader, you got more of a gift than expected because the Fed is buying more than expected in the back end," said Cary Leahey, managing director and senior economist at Decision Economics in New York.

Robert Tipp, chief investment strategist for Prudential Fixed Income in Newark, New Jersey, said by "skewing purchases disproportionately toward the long end of the curve, the Fed reduced the amount of money needed per basis point to get long-term market rates down."

Bonds also benefitted from the perception that the Fed's decision to lower long-term rates - by buying $400 billion in securities while actively selling short-dated notes - showed it was ready to take more action, if needed, to aid the economy.

Such action could include stating specific policy goals for inflation or employment, or by buying more assets outright.

Early stock market weakness also drew investors toward safe-haven US government debt.

Data on new US jobless claims had little discernible market impact. The government said Americans filed fewer new claims for jobless benefits last week, but the drop to 423,000 from 432,000 the previous week was not enough to ease worry that the economy was close to falling into a new recession.

The Fed on Wednesday warned of "significant" risks to the economy as it launched a new plan to boost growth by lowering the cost of borrowing.

"The economy is chugging along near stall speed," said Rudy Narvas, economist at Societe Generale in New York.

COPYRIGHT REUTERS, 2011