Bond rally gains traction as stocks fall
Treasury prices move higher after Fed's purchase operation and Bernanke's comments about deficit, economic outlook.
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| Click on the chart to see other government bond prices and yields. |
NEW YORK (CNNMoney.com) -- Treasury prices rose Wednesday after the Federal Reserve's purchase of government debt and Fed Chairman Ben Bernanke's comments about the national deficit.
The rally gained steam as stocks sold off in afternoon trading.
The benchmark 10-year note rose 19/32 to 96 17/32 and its yield fell to 3.55%. Bond prices and yields move in opposite directions. The 30-year bond edged up 23/32 to 96 29/32 and its yield dipped to 4.44%
The 2-year note ticked up 2/32 to 99 30/32 and its yield stood at 0.92%. The yield on the 3-month held steady at 0.14%.
In an effort to keep a lid on yields and mortgage rates, the government has pledged to purchase $300 billion of its own debt. As part of that "quantitative easing" campaign, the Federal Reserve bought $7.5 billion worth of debt Wednesday that matures between May 2016 and February 2019.
On Thursday, the government is slated to buy an undisclosed amount of debt maturing between May 2011 and April 2012.
With mortgage ratesremaining elevated, "the quantitative easing campaign seems to be sputtering, but not for lack of effort," said Kevin Giddis, head of fixed income at Morgan Keegan, in a daily research note.
Bernanke's take: Fed chairman Bernanke told a House committee he still anticipates that the economy will start its recovery later this year, but that unemployment will continue to rise.
He also said that while the massive spending that has raised debt levels is necessary to prop the economy, the nation needs to begin planning for "the restoration of fiscal balance."
Supply has been a factor in falling debt prices. The government has been selling an unprecedented amount of debt to pay for its rescue of the economy, including $30 billion in aid to help the General Motors through bankruptcy proceedings just this week.
On Thursday, the Treasury is scheduled to announce the amount of debt the government will auction in the reopening of the 10-year and 30-year auctions, in addition to the size of the upcoming 3-year sale.
Employment. Weakness in the labor market will drag on the recovery. The unemployment rate currently stands at a 25-year high of 8.9%. The next reading, for May, is due out Friday and economists expect the rate to bump up to 9.2%. Two reports released Wednesday showed that the labor market was still weak, but there were modest signs of improvement.
Lending rates: One key bank-to-bank lending rate plunged to another record low. The 3-month Libor fell to 0.64% Wednesday from 0.65% the day prior, according to Bloomberg.com. The overnight Libor rate was unchanged, holding steady at 0.26%.
Libor, the London Interbank Offered Rate, is a daily average of rates that 16 different banks charge each other to lend money in London. The closely watched benchmark is used to calculate adjustable-rate mortgages. More than $350 trillion in assets are tied to Libor. 
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