Treasurys surge on Fed programs
Yields fall to historic lows as the market responds to the central bank's plan to buy mortgage-backed securities and possibly Treasurys.
NEW YORK (CNNMoney.com) -- Prices for U.S. Treasurys rose Thursday, pushing yields to record lows, as investors respond to aggressive new moves by the Federal Reserve.
The benchmark 10-year note rose 1 5/32 to 114 31/32 and its yield fell to an all-time low of 2.07%, down from 2.18% late Wednesday. Bond prices and yields move in opposite directions.
The 30-year long bond surged 3 20/32 to 141 9/32. The 30-year yield fell to 2.52%, marking its lowest level since the bond was introduced in 1977.
The 2-year note advanced 4/32 to 101 3/32 and its yield fell to 0.68% from 0.74%.
"This rally steam rolls anything that gets in front of it," said Steve Van Order, chief fixed-income strategist at Calvert Funds, which has approximately $12.5 billion in assets under management. "The bears have pretty much been eliminated from the market."
Treasurys have rallied over the last six days with the 10-year yield dropping 51 basis points to 2.18% on Wednesday from 2.69% on Dec. 10. It stood at 3.53% a month ago.
Van Order said the rally "has its roots in the announcements the Fed made about buying agency debt."
Fed moves: On Tuesday, the Fed lowered its key interest rate to a range between 0% and 0.25%, which just about maxed out the central bank's main tool for combating economic weakness.
At the same time, the Fed reaffirmed its plans to buy mortgage-backed securities and said it is considering "the potential benefits of purchasing longer-term Treasury securities."
By signaling its willingness to buy Treasurys, the Fed "fired up another leg of this gigantic rally," Van Order said.
Meanwhile, the Fed's support of the mortgage-backed securities market has helped bring down mortgage rates, which has led to a spike in refinancing activity.
The Fed announced on Nov. 25 that it would 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. It also said it would buy another $100 billion in direct debt issued by those firms.
One day after that announcement, mortgage rates dropped sharply and the 10-year yield fell below 3% for the first time in its history.
As property owners refinance their loans, holders of mortgage-backed securities often readjust their portfolios by purchasing Treasurys, Van Order said.
Freddie Mac said Thursday that rates on 30-year fixed mortgages fell to a 37-year low this week.
Lending confidence: Separately, bank-to-bank lending rates fell overnight in response to the Fed's interest-rate cut Tuesday.
The overnight Libor rate declined to 0.11% from 0.13% on Tuesday, while the 3-month Libor rate dropped to 1.52% from 1.58%, according to Bloomberg.com.
Libor, the London Interbank Offered Rate, is a daily average of what 16 different banks charge other banks to lend money in London, and is used to calculate adjustable-rate mortgages. More than $350 trillion in assets are tied to Libor.
Meanwhile, two key indicators showed the market's appetite for risk has increased slightly.
The "TED spread" narrowed to 1.51 percentage points from 1.57 percentage points Wednesday. The TED spread measures the difference between the 3-month Libor and the 3-month Treasury bill, and is a key indicator of risk. The higher the spread, the more unwilling investors are to take risks.
Another indicator, the Libor-OIS spread, shrank to 1.3 percentage points from 1.4 percentage points as the Overnight Index Swap rate fell to 0.19% from an opening level of 0.24% Tuesday.
OIS rates are set against the effective Fed funds rate, as opposed to the central bank's target rate or range. The Libor-OIS spread measures how much cash is available for lending between banks, and is used for determining lending rates. The bigger the spread, the less cash is available for lending. 
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