NEW YORK (CNN/Money) - U.S. Treasurys extended their gains Tuesday as the Federal Reserve met market expectations and cut interest rates a quarter-percentage point but kept its bias tilted toward more weakness in the economy, thereby keeping the door open for more cuts.
At 3 p.m. ET, two-year notes were up 4/32 at 100-1/32, yielding 2.97 percent. Five-year notes were up 11/32 at 96-14/32, yielding 4.31 percent. Benchmark 10-year notes were up 12/32 at 99-20/32, yielding 5.05 percent. Thirty-year bonds were up 26/32 at 98-6/32, yielding 5.50 percent.
The market was already firm for a second straight session, but prices, particularly of interest-rate-sensitive shorter-dated issues, extended those gains after the Fed announced its decision to cut rates for the 11th time this year.
"The front end of the curve tried to rally a little bit and there was a trade down in the belly of the curve," said Dominic Konstam, head of interest-rate strategy at Credit Suisse First Boston. "We expect the Fed to cut rates another quarter-percentage point in January and for federal funds to be at 1.5 percent in the middle of 2002. We're looking for a recovery in the third quarter of next year."
The latest easing by the Fed is the 11th this year - a record number in a single year -- and reflects the central bank's year-long effort to prop up the ailing U.S. economy. The Fed said it cut its target for the federal funds rate to 1.75 percent from 2.0 percent, bringing the rate that banks charge each other for short-term loans to its lowest level in about 40 years. The cut was in line with what most Wall Street economists had forecast. In the closely watched statement accompanying its decision, the Fed signaled it was leaning toward cutting rates again, saying there still were risks to the health of the world's largest economy. "The [Fed's policy-making] committee continues to believe that, against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future," the Fed said in its statement.
In the currency market, the dollar held steady against the yen and the euro following the Fed's quarter-percentage point rate cut.
At 3 p.m. ET, the euro was quoted at 89.15 U.S. cents, up from 89.07 cents late Monday.
The dollar was quoted at ¥126.22, up from ¥125.97 late Monday. 
--from staff and wire reports.
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