30-year bonds rally as traders bet on Fed plan
An afternoon downturn in Wall Street stocks also renewed safety bids for Treasuries.
The Fed's $400 billion plan, commonly referred as "Operation Twist," involves the sale of short-dated debt and purchase of longer-dated government securities. The move is intended to lower mortgage rates and long-term borrowing costs and to revive borrowing and investments -- whose recent slowdown has worried the Fed.
"It looks like a very cheap part of the curve and the 'Twist' can correct this," David Keeble, global head of interest rate strategy at Credit Agricole Corporate & Investment Bank in New York said of the 30-year bond.
On Friday, the New York Federal Reserve will announce the initial schedule for Operation Twist.
The rebound in the 30-year bond came after a recent sell-off fueled by hopes that European leaders would contain their debt crisis and economic data that were not as dismal as some traders had feared.
The German parliament passed a bill on Thursday to give new powers to the region's rescue fund, the EFSF, as widely expected, with majority backing from Chancellor Angela Merkel's ruling coalition.
The 30-year bond shot up 1-15/32 in price for a yield of 3.01 percent, down 7 basis points for the day but still about 25 basis points above its intraday low last Friday.
New supply weighed on the bond market earlier, as uncertainty hung over a $29 billion sale of seven-year notes, the last part of this week's $99 billion in coupon-bearing supply.
Demand for the latest seven-year notes was highest in four months, but their yield came in above expectations and indirect bids declined from the prior auction.
After the seven-year debt sale, a fresh wave of curve- flattener trades emerged, pushing 30-year bonds up 1 point in price and short-dated Treasuries prices down to session lows.
Benchmark 10-year Treasury notes rose 5/32 in price for a yield of 1.96 percent, down 3 basis points for the day. They erased their earlier losses tied to less dismal data on jobless claims and economic growth.
Copyright Reuters, 2011