Bonds rally on Fed easing prospects, euro zone

As they have for weeks, long-dated Treasuries outperformed shorter ones on the expectation that one aspect of the Fed's next easing attempt will be a gradual shift in its balance sheet composition toward longer-dated securities. The Fed holds a two-day monetary policy meeting on Sept. 20-21.

In early dealings, benchmark 10-year notes rose 16/32, their yields easing to 1.99 percent from 2.05 percent on Friday. Thirty-year bonds rose 1-10/32, their yields falling to 3.25 percent from 3.31 percent on Friday.

In contrast, two-year Treasury notes were unchanged, yielding 0.17 percent. The Fed has said it will keep short-term interest rates near zero at least until mid-2013.

Worries about the euro zone's debt situation pushed US bond prices up and their yields even lower, as such concerns typically inspire a flight to quality to safe-haven US debt.

Traders were awaiting the results of a conference call between EU and IMF inspectors and Greek 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