Have bond yields bottomed, even if the Fed ramps up buying?

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Treasury bond yields rose Thursday after the government saw relatively weak demand at its sale of new 30-year bonds -- which followed disappointing investor bidding at auctions of three-year and 10-year notes earlier in the week.

Uncle Sam can still borrow plenty, and cheaply, but the dimming of demand this week added to the sense that the Treasury market already has priced in the big new bond-buying program the Federal Reserve is expected to announce soon.

In other words, investors haven’t been willing to just keep accepting ever-lower yields to buy Treasuries, even with the Fed in the wings.

Bond investors also may have been waiting this week on Fed Chairman Ben S. Bernanke, who will give a speech on Friday in Boston. He is expected to provide more guidance about the central bank’s plans ahead of the Fed’s next policy meeting on Nov. 3.

On Thursday the Treasury sold $13 billion in 30-year bonds at an annualized yield of 3.85%. The yield on previously issued 30-year T-bonds jumped to a four-week high of 3.92% after the auction from 3.83% on Wednesday and a recent low of 3.66% on Sept. 28.

The 10-year T-note yield, a benchmark for mortgage rates, rose to 2.49% from 2.43% on Wednesday. The yield hit a 21-month low of 2.38% last week, which is why mortgage rates subsequently fell to generational lows.

Expectations have been building for the last two months that the Fed would try to bolster the economy by ramping up bond purchases, with the goal of pushing longer-term interest rates lower.

Investors and traders already have given the Fed at least some of what it wanted by driving yields down sharply since early August. The 10-year T-note yield was 2.96% on Aug. 2.

Now the debate is over how much lower Treasury yields can go even if the Fed starts buying in bigger quantities.

Dan Greenhaus, bond strategist at investment firm Miller, Tabak & Co. in New York, believes that at a yield of about 2.4% on the 10-year T-note, “It’s pretty safe saying the market is pricing in $1 trillion of [additional] Fed purchases.”

The action in yields over the last week seems to support Greenhaus’ view, because that $1-trillion figure has been bandied about a lot.

Encouraged by the prospect of more Fed help for the economy, investors have been pouring money into stocks, commodities, foreign currencies and other assets over the last few weeks, which also may be denting demand for Treasuries. And if investors figure that the Fed will succeed in boosting economic growth, it would be logical for them to assume that bond yields would go higher, not lower -- so why lock in current rates?

But some analysts think Treasury yields are nearing levels where buyers will jump back in.

“I think 2.5% on a 10-year is a buy,” said Tom Di Galoma, head of U.S. interest rates trading at Guggenheim Securities in New York.

With the market in flux, Bernanke’s comments Friday will be closely scrutinized: Will he strongly suggest that the Fed expects to be able to push rates significantly lower?

-- Tom Petruno

The Treasury building in Washington. Credit: Chip Somodevilla / Getty Images