Treasuries rise

US government debt prices rose on Tuesday as persistent worries about the economy stoked buying of lower-risk government debt and pushed longer-dated yields down from one-month highs. Adding to the rebound in bonds for a second day was speculation a recent rise in yields may have the Federal Reserve mulling a move to buy more Treasuries on top of what it has already been purchasing with funds from maturing mortgage securities.
Benchmark 10-year notes traded 24/32 higher in price for a yield of 2.67 percent, down from 2.75 percent late on Monday. It reached 2.85 percent on Monday, which was the highest since August 6, according to Reuters data. The 30-year bond traded 1-6/32 higher, rebounding from a 12/32 drop tied to the retail sales data. Its yield was last 3.79 percent after touching a one-month high of 3.93 percent on Monday.
The spread between two-year and 10-year yields, which narrows with expectations of slower US growth, shrank to 217 basis points from 221 late on Monday. Bonds also were boosted by the increased amount of government debt that the Federal Reserve will buy in the coming weeks, analysts said.
Since August, the Fed has been spending proceeds from its maturing mortgage securities on Treasuries, a move seen to help lower long-term interest rates to energise a slowing economy. The US central bank on Monday said it plans to buy about $27 billion of Treasuries starting this week up to early October. This is $9 billion more than its initial round of government debt purchases.
Goldman Sachs reiterated on Tuesday in a comment to the Wall Street Journal its outlook that the Fed would again move to expand its balance sheet later this year or early 2011. The Fed bought $300 billion in Treasuries last year. The Fed's quantitative easing measures in part spurred a surge in refinancing and faster prepayments on mortgage bonds. To reflect this faster prepayment climate, Barclays Capital analysts will implement changes to their model that predicts prepayments on fixed-rate loans that support MBS.
These changes, which become effective on September 22, will sharply extend the duration or sensitivity to interest rates on several of Barclays widely-followed bond indexes. The easiest way for fund managers to match these expected longer index durations is to buy Treasuries.