US Treasuries gained on Monday with investors buying lower-risk debt as the spreading global credit crisis roiled Europe and hit equities markets hard around the world. Shorter-dated Treasuries pared early gains however, after the Federal Reserve said it will begin to pay interest on banks' required excess reserve balances.
Early in the day, traders had bid shorter-dated bonds higher on expectations the Fed - the US central bank - would announce an interest rate cut on Monday morning. When that didn't happen, bonds lost some of their bid. "We saw the Fed announce that it is planning various further options to increase liquidity ... so the markets assumed that means that the Fed probably is not going to be cutting rates any time soon," said Kim Rupert, managing director of global fixed income analysis for Action Economics in San Francisco.
The Treasury also announced on Monday morning that it would increase the size of its debt securities auctions in an effort to free up the short-term lending market. But bonds retained at least some of their bid as stock futures pointed to a sharply lower open on Wall Street. European stocks plunged on Monday after several governments moved to extend guarantees on bank deposits as banks struggled to survive.
Benchmark 10-year Treasury notes were trading 21/32 higher in price for a yield of 3.52 percent from 3.60 percent late on Friday, while 2-year notes were 5/32 higher for a yield 1.51 percent from 1.59 percent. The yield on 2-year notes is at its lowest since mid-September and well below the Fed's target rate of 2 percent on overnight lending between banks.