1st time ever: 10-year yield is below 3%
Government debt prices jump as mortgage rates fall and economic outlook remains dark.
NEW YORK (CNNMoney.com) -- Demand for U.S. Treasury bonds surged Wednesday, lowering the yield on the benchmark note to an all-time low, as investors responded to grim economic data and falling mortgage rates.
The closely watched 10-year note rose 1-3/32 to 106-18/32, and its yield fell to 2.99% from late Tuesday's 3.10%. The yield on this note has never gone below 3% in its 46-year history.
Wednesday's advance comes amid dour reports on the nation's labor market, housing market, manufacturing sector and consumer spending. Investors often flock to the safety of government bonds when economic conditions deteriorate.
At the same time, a recently announced government plan to buy mortgage-backed securities drove holders of those securities into the Treasury market, according to Kim Rupert, fixed income analyst, Action Economics.
The Federal Reserve said Tuesday it will purchase up to $500 billion in mortgage- backed securities that have been backed by Fannie Mae (FNM, Fortune 500), Freddie Mac (FRE, Fortune 500) and Ginnie Mae, the three government-sponsored mortgage finance firms set up to promote home ownership. It will also buy another $100 billion in direct debt issued by those firms.
Mortgage rates fell sharply in response to Tuesday's announcement. Rates on 30-year fixed rate mortgages averaged 5.81% Tuesday, down from an average 6.06% on Monday, according to Bankrate.com.
The government's plan is a "huge backstop" for the mortgage-backed securities market, and lower mortgage rates could lead to a "refinancing boom," Rupert said. "As mortgage holders refinance their loans, that restructures mortgage- backed portfolios."
Treasurys are the preferred alternative to mortgage-backed securities because they are of comparable duration, Rupert said.
Prices for other government debt instruments also rose.
The 30-year bond rose 1-31/32 to 117-28/32, and its yield fell to 3.52% from 3.62%. Before last week, the yield on the 30-year bond had only once before fallen below 4% and that was at the height of the credit crisis in October.
The 2-year note rose 5/32 to 100 9/32, and it yielded 1.12%, down from 1.18%.
The yield on the 3-month note fell to 0.08% from 0.12% late Tuesday. The yield on the 3-month Treasury bill is closely watched as an immediate reading on investor confidence, with a lower yield indicating less optimism. 
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