US bonds up

The US Treasury debt market rallied on Tuesday, prompted by solid demand for a record $40 billion offering of two-year notes and speculation that the Federal Reserve will open the door to buying long-dated government bonds. The 30-year Treasury bond led the market advance, snapping a six-session losing streak, which many analysts say was overdone and poised for a correction.
"Just maybe the Fed may announce it will buy long-dated Treasuries. It's a case of buy the rumour and sell the news," said Richard Schlanger, portfolio manager at Pioneer Investments USA in Boston. The Federal Open Market Committee, the Fed's policy-setting group, began a two-day meeting on Tuesday.
Traders hope Fed policy-makers will pledge more support to combat the current recession, which has entered its second year. In December, the FOMC adopted a near zero interest rate policy in response to further economic deterioration. Adding to Treasuries' upswing were revived safety bids in reaction to grim data that showed rock-bottom consumer confidence and a record year-over-year drop in home prices, analysts and investors said.
The prolonged weakness in the housing sector reinforced worries about deflation risks that could hamper an economic recovery, they said. "Ultimately, they are concerned about a deflationary environment in the near term," Schlanger said.
Deflation fears, together with bets the Fed could buy long-dated Treasuries, propelled 30-year bond prices up nearly 3 points. The long bond's yield, which moves inversely to price, was at 3.26 percent, down 12 basis points from late on Monday after rising 51 basis points the prior six sessions.
Appetite for new Treasuries staged a comeback on Tuesday after poor demand at Monday's auction of $8 billion of 20-year Treasury Inflation-Protected Securities (TIPS). On Wednesday, the Treasury will sell $35 billion in 70-day cash management bills, followed by $30 billion in five-year notes on Thursday. In the cash market, the price in two-year Treasury notes was up 1/32 at 100-3/32. Their yield, which moves inversely to price, was 0.82 percent, down from 0.84 percent late on Monday. The benchmark 10-year Treasury note's price rose 29/32 for a yield of 2.55 percent, down from 2.65 percent late on Monday.