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Treasury bond yields dive as market bets on new Fed buying plan

September 19, 2011 | 11:48 am

Another slump in global stocks is helping to drive investors back to U.S. Treasury bonds, sending yields sharply lower again.

Something else also is stoking demand for Treasuries: expectations that the Federal Reserve this week will announce a new bond-buying plan specifically aimed at pulling long-term interest rates lower.

The 30-year Treasury bond yield slid to 3.19% as of 11:40 a.m. PDT on Monday, down from 3.31% on Friday and the lowest since January 2009.

The 10-year T-note, a benchmark for mortgage rates, fell to 1.94%, down from 2.05% on Friday and nearing the recent generational low of 1.92% reached on Sept. 9.

Bond yields tumbled at the opening of trading after European markets took another drubbing on fears that a debt default by Greece is becoming inevitable. Europe’s unending woes then tripped Wall Street, which had rebounded last week. The Dow Jones industrial average was off 172 points, or 1.5%, to 11,336 at about 11:40 a.m. PDT, after rallying 4.7% last week.

The renewed pain in equity markets is boosting Treasury bonds’ role as a classic haven.

Bond buyers also are confident that the Fed will try to keep yields moving lower: Wall Street’s main bond dealers have been stockpiling Treasuries, anticipating that the central bank wants to pull longer-term yields down further.

Fed policymakers meet Tuesday and Wednesday. Many bond pros believe the Fed will conclude its meeting by announcing a plan to sell some of its shorter-term Treasury holdings and use the proceeds to buy longer-term issues, such as 10-year notes, over an extended period.

With short-term rates already near zero, the idea would be that the Fed could help bolster the economy by putting further downward pressure on longer-term rates. That could help pull mortgage rates lower (good for homeowners who can refi) and cut borrowing costs on long-term bonds issues by companies and state and local governments.

Whether it would make a big difference in the economy isn’t clear, but the bond market figures the Fed has little to lose by trying.


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-- Tom Petruno

 Photo: The Federal Reserve Building in Washington. Credit: Karen Bleier / AFP / Getty Images