US yields near lows on Fed prospects, euro zone

LONDON: US Treasury yields fell on Monday with markets braced for more monetary easing from the Federal Reserve, and any further bad news on the euro zone debt crisis could see yields testing new lows.

US Treasury prices rose, taking yields down 7.1 basis points to 1.987 percent, not far from 1.879 percent hit last week, the lowest in at least 60 years. Yields on 30-year US debt also fell 7.1 basis points to 3.25 percent.

Facing rising global financial strains and recession fears, the US Federal Reserve is expected to announce this week it will begin to shift the composition of its balance sheet to weight it more heavily with long-term securities in a bid to bring long-term interest rates down.

But many analysts are skeptical about the success of so-called "Operation Twist", after two rounds of quantitative easing failed to revive economic growth. The Fed, which has said it will keep interest rates near record lows for some time, holds a monetary policy meeting on September 20-21.

"(They are) not a binding constraint to the economy, the capital market rates, so I think lowering them further is a bit pointless," Philip Marey, strategist at Rabobank said.

US Treasury prices also tracked gains in their German counterparts after euro zone policymakers disappointed market expectations, failing to come up with new ideas at a meeting last week to halt a deteriorating regional crisis.

"What's happening today is definitely more euro-centric. People were looking or at least were optimistic that we were going to get some sort of plan or coordinated efforts on Greece. It hasn't been the case," Craig Collins, trader at Bank of Montreal said. "Now we are back testing some crucial levels on 10-year yields."

More bad news out of Europe could take yields lower, market watchers said. EU and IMF inspectors hold a conference call with Finance Minister Evangelos Venizelos later on Monday. Without fiscal reforms, lenders have threatened to withhold the next tranche of bailout aid for Greece -- without which the country is expected to run out of cash in October.

Copyright Reuters, 2011