Prospective Federal Reserve asset purchases kept US government securities prices mostly steady on Wednesday with investors wary of selling just as the Federal Reserve is about to buy. Comments by Fed officials since their last policy meeting have left the market with no doubt that the US central bank thinks it must do more to ensure the highest level of employment compatible with price stability.
This conviction has pushed bond prices higher and yields lower in recent weeks. On Wednesday, some of the day's modest gains deflated in late trade. The benchmark 10-year note, up for part of the session, ended with a 2/32 point loss. Its yield stood at 2.48 percent, little changed from Tuesday.
The Fed's Beige Book, which will brief Fed policymakers at their November 2-3 meeting, reported the economy grew sluggishly in recent weeks, supporting the market's now well established view that the Fed will buy more assets to support the economy. To help stop the most severe economic contraction since the Great Depression from turning into another depression, the Fed pushed overnight interest rates to zero in December 2008 and then bought $1.7 trillion in government and mortgage-linked bonds to offer more support for the economy.
The 30-year bond rose 11/32, its yield easing to 3.89 percent from 3.91 percent on Tuesday. The long bond has been the most volatile maturity as traders speculate on QE2's likely impact on long-term inflation. Last week, the 30-year yield touched 4.00 percent for the first time since early August. "The 30-year is vulnerable," Dwight's Wulf said. "An aggressive QE2 leaves the risk for higher future inflation."
The yield spread between 10-year and 30-year debt shrank to 141 basis points from 144 basis points late Tuesday, but the 2-to-10-year part of the curve widened to 212 basis points. The Fed bought $660 million of Treasury Inflation-Protected Securities with proceeds from maturing mortgage securities, the third TIPS purchase after it bought $360 million in August and $550 million in September.