Treasuries climb

US 30-year Treasuries rallied sharply on Thursday, capping their best two-day gain since the government scrapped long bonds 10 years ago, as investors snapped up safe havens on renewed fears of recession. Downbeat economic data out of Europe and China revived global slowdown concerns and added fuel to a bond rally that started when the Federal Reserve announced plans to reallocate $400 billion of its bond portfolio into long-term Treasuries.
The Fed delivered a sober outlook on the economy that also rattled investors, who are coming off a summer of anxiety due to Europe's debt crisis, a downgrade to the US credit rating and growing evidence the economy is stagnating. The fears provided kindling for the biggest two-day drop in 30-year yields since the two-day period ended November 1 2001, according to Reuters data. The Treasury on October 31, 2001 announced it would stop offering long bonds. It brought them back in 2006.
"The Treasuries market is getting a flight-to-quality bid," said Mary Ann Hurley, vice president of fixed income trading at D.A. Davidson & Co in Seattle. "Not only do we have Operation Twist coming, but you have a Fed that ramped down its expectations for economic growth, which is what the stock market is trading off of, and you have Europe as a major problem."
Major US stock indexes tumbled over 3 percent on Thursday and benchmark Treasury yields touched the lowest in at least 60 years. Benchmark US 10-year notes traded 1-11/32 higher in price with their yields falling to 1.72 percent, marking the lowest level in at least 60 years and down from 1.87 percent late Wednesday. The 30-year bond climbed 4-15/32 in price, with its yield falling to 2.80 percent, down from 2.99 percent late on Wednesday. Bond yields dipped to 2.76 percent, marking the lowest since January 2009.
"Investors know the Fed will be buying bonds so they think Treasuries are a safe haven," said Gary Thayer, chief macro strategist at Wells Fargo Advisors in St. Louis, Missouri. On Wednesday, the Fed announced a plan aimed at cutting the cost of mortgages, corporate bonds and other kinds of credit by buying long-term federal debt over the next nine months, raising money for the purchases by selling holdings of short-term debt. The plan is known in the financial markets as Operation Twist.
The Fed also noted "significant" risks to the economy. Before yesterday, the Federal Reserve had only used the word "significant" three times since the beginning of the financial crisis to describe its view of downside economic risk in post-meeting statements.
The strategy of buying longer-dated Treasuries at the expense of shorter ones pushed the price of 10- and 30-year Treasuries sharply higher, shrinking the difference between short- and long-term yields. The difference between 2- and 10-year yields stood at 151 basis points on Thursday, down sharply from 204 a month ago when markets began to anticipate more monetary easing.