US Treasury prices rally

US government bond prices jumped on Monday as stocks took a dive and the Federal Reserve made its largest foray yet into longer-dated Treasuries. With the supply of new notes letting up for the coming two weeks, traders seemed willing to take a chance on a market that has taken a heavy beating over the past six weeks.
The rebound propelled benchmark 10-year notes a full point higher in price, driving yields down to 3.17 percent, down ten basis points from Friday's close. "Perhaps the out of sight out of mind mentality will pave the way for a recovery in the long bond," said Carley Garner, senior analyst at DeCarley Trading. "The Fed, and investors alike, went bargain-hunting on the long end of the yield curve."
Indeed, the Fed bought $3.5 billion in bonds maturing from 2026 to 2039, more than its previous foray into the very long end of the market, while losses of around 2 percent on Wall Street added to the firm tone in bonds. The buying was part of the Fed's $300 billion plan to purchase government debt to help keep borrowing costs low throughout the recession-bound economy. Dealers took the volume of buying as a sign of renewed commitment.
"This may be a statement from the Fed - that's a lot of long-end buying," said Ian Lyngen, interest rate strategist at RBS Securities. The 30-year bond closing the session up 1-19/32, its yield easing to 4.18 percent from 4.27 percent. Monday's purchases come as the bond market prepares for a period of respite after an onslaught of debt auctions in recent weeks.
There is no new supply of coupon securities scheduled until the May 26 auction of two-year notes. Bonds also benefited from concerns over the reliability of the Treasury's bank stress tests after reports that the methodology used may have been too lenient.
This shoved the S&P 500 down 20 points or 2.15 percent. Such pessimism fuelled the rally in bonds, allowing traders to overlook a sharp upward revision in the White House's budget deficit. It was now expected to come in at $1.84 trillion - representing a massive 13 percent of gross domestic product - in the 2009 fiscal year that ends on September 30.