Treasurys mixed after auction, Fed plan

Treasury auctions $40 billion in 2-year notes. Federal Reserve to buy long-term debt Wednesday.

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NEW YORK (CNNMoney.com) -- Treasurys turned mixed Tuesday, with the 30-year bond advancing, after the Federal Reserve released details of its plan to buy longer-term issues and the government auctioned another $40 billion in U.S. debt.

After announcing plans to buy $300 billion in longer term bonds last week, the Federal Reserve said it will hold its first purchase operation Wednesday, which will be settled Thursday.

The Fed also released a tentative schedule that suggests the central bank will include 30-year bonds in its purchase operations. The 30-year bond soared 3.5% after the announcement before easing.

"The market is making the assumption that the Fed is either going to buy back long bonds or is willing to do so at some point," said Kenneth Naehu, managing director of fixed income at Bel Air Investment Advisors.

The purchases are part of the Fed's plan to buy up to $1 trillion in debt-related assets, including $300 billion in Treasurys and another $750 in mortgage-backed securities. The goal is to drive down interest rates on consumer and business loans, and help ease the flow of credit.

Starting April 1, the New York Fed will release a tentative operation schedule every two weeks. It expects to hold 2 to 3 operations per week over the next six months.

Meanwhile, the Treasury kicked off a record $89 billion debt offering this week with an auction of $40 billion in 2-year notes. The auction drew more than $108 billion worth of bids, for a bid-to-cover ratio of 2.71 - a signal that the sale was well received.

"The auction came in stronger than expected," said Michael Strauss, chief economist at Commonfund, a money management firm based in Wilton, Conn.

While the results suggest that demand for 2-year notes remains robust, Strauss said the market could have trouble sustaining that level of demand when the government auctions longer-term issues.

"The longer end of the curve is where the supply is coming," he said.

The Treasury will offer $34 billion in 5-year notes on Wednesday and $24 billion in 7-year notes on Thursday.

The auctions come as the government seeks billions to fund its myriad economic rescue plans. So far, this year's massive auctions have met with healthy support from domestic and foreign investors, but the market was jolted earlier in the month when Chinese Premier Wen Jiabao said he had "some worries" about the safety of U.S. debt.

Indirect bidders, which include many foreign central banks, bought more than half of the $40 billion in short-term debt auctioned Tuesday.

Bondholders are also mindful of a new "Public-Private Investment Program," officially unveiled Monday, aimed at purchasing up to $1 trillion in bad assets from banks to cleanse their balance sheets and get them lending again.

The toxic asset problem has been intimately connected with the credit market for over a year. The troubled holdings continue to plague banks - as the value of the underlying loans backed by securities decline, the financial institutions holding those securities have to write down their value, resulting in steep losses for the banks.

The Treasury's program seeks to revive the market for assets backed by mortgages and other loans by drawing in private investors with low interest loans and subsides.

Bond prices: The benchmark 10-year note was down 11/32 at 100 15/32 and its yield rose to 2.7% from late 2.66% late Monday. Bonds and yields move in opposite directions.

The 30-year bond rose 1 to 97 17/32 with a yield of 3.64%.

The 2-year note was down less than 1/32 to 99 30/32, and yielded 0.92%.

The 3-month yield rose to 0.22%.

Lending rates: The 3-month Libor rate edged up to 1.23% from 1.22% on Monday, according to data on Bloomberg.com. The overnight Libor rate held steady at 0.29%.

Libor, the London Interbank Offered Rate, is a daily average of rates that 16 different banks charge each other to lend money in London.

Two credit market gauges were mixed, reflecting relatively unchanged conditions. The "TED" spread widened slightly to 1.01 percentage points from from 1 percentage point Monday. The narrower the TED spread, the more willing investors are to take risks.

The Libor-OIS spread shrank to 0.99 percentage point from 1 percentage point on Monday. A narrower spread indicates that more cash is available for lending. To top of page

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