Treasury Prices Rebound after Fed Announcement

By Stephen Bernard | September 23, 2009 | 4:30 PM EDT
New York (AP) - Treasury prices rebounded Wednesday after the Federal Reserve board alleviated worries about inflation.
Bond prices rose slightly in afternoon trading Wednesday, having fallen earlier in the day on disappointing results from the auction of five-year notes.
The price of the benchmark 10-year note rose 6/32 to 101 20/32 and its yield fell to 3.43 percent from 3.45 percent late Tuesday. The yield on the 10-year note is closely tied to rates on consumer loans such as mortgages.
A potential rate increase from the Fed has been one of the primary worries for bond traders. A rate increase by the Fed to stave off inflation would also likely send other rates higher, which would push the value of existing bonds lower.
The Fed said that while the economy is improving, "conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period."
Traders have also been concerned about weakening demand for new government debt. There is some worry that the amount of bonds being issued to stimulate the economy could saturate the market. If demand steadily falls, the government would be forced to raise rates to lure buyers. That in turn would send prices lower.
Bond prices had fallen earlier in the day after the results of the Treasury Department's auction of $40 billion in five-year notes showed waning demand.
The bid-to-cover ratio, a measure of overall demand, was 2.40, below the 2.51 level at last month's auction. Indirect bidders, a measure of foreign demand, fell to about 45 percent from about 56 percent.
The price of the five-year note rose 6/32 to 99 31/32, sending its yield down to 2.38 percent from 2.42 percent.
Wednesday's auction results followed strong demand for 2-year notes at an auction a day earlier. Demand for $43 billion in 2-year notes on Tuesday was the strongest for that maturity since September 2007.
The higher demand for shorter-term notes and waning interest in longer-dated notes could be another sign that investors are concerned about the long-term effects of massive government stimulus spending on inflation.
In other trading, the price of the 30-year bond rose 1/32 to 105 3/32. Its yield was unchanged at 4.20 percent.
The yield on the three-month T-bill rose to 0.10 percent from 0.09 percent.
The cost of borrowing between banks held steady. The British Bankers' Association said the rate on three-month loans in dollars - the London Interbank Offered Rate, or Libor - was unchanged at 0.29 percent.
Treasury prices rebounded Wednesday after the Federal Reserve board alleviated worries about inflation.