Treasurys under pressure

Prices mostly fall after the Fed says it will finish its $300 billion buyback program of long-term Treasurys by October; a 10-year note auction draws firm demand.

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By Ben Rooney, CNNMoney.com staff writer

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NEW YORK (CNNMoney.com) -- Treasury prices turned mixed Wednesday, with 2-year notes edging up slightly, on a day in which the Federal Reserve said it would slow the pace of its purchases of long-term securities and a 10-year note auction drew firm demand.

The U.S. central bank, which has been buying Treasurys since March to help keep rates lower, said it would continue purchasing the securities through October, but at a slower pace "to promote a smooth transition in the markets."

Most experts had anticipated the $300 billion program to wind down in September.

"The Fed is trying to wean the market off of its purchases," said Steve Van Order, a fixed income analyst at Calvert Funds. He said the Fed's assessment of the economy was slightly more upbeat, but that Wednesday's statement was largely identical to the one issued in July.

As expected, the Fed held its benchmark interest rate at historic lows near zero percent, but said "economic activity is leveling off." That's the central bank's most optimistic reading on the economy in more than a year.

A down day. Prices had been lower before the announcement as stocks rallied, undermining demand for safe-haven assets such as Treasurys.

Selling gained some momentum following the Fed's 2:15 p.m. ET announcement but prices largely bounced within an hour. Treasurys were also under pressure Wednesday afternoon following a $23 billion auction of 10-year notes.

The government said it received bids totaling $57 billion for the 10-year notes offered, which made for a bid-to-cover ratio of 2.49.

A ratio above 2 is generally considered as a reflection of healthy demand. The last auction of 10-year notes, which was in May, had a ratio of 2.47.

Indirect bidders, which include foreign central banks, bought 45% of the notes. That compared with 32% in May's auction.

The benchmark 10-year note was down 11/32 to 95-6/32. Its yield rose to 3.71% from 3.69% late Tuesday and the median yield of 3.64% in the auction. Bond prices and yields move in opposite directions.

Wednesday's note sale was the second of three offerings this week totaling a record $75 billion.

"The auction went well considering the apprehension ahead of the Fed meeting," said Kim Rupert, fixed-income analyst at Action Economics.

"The statistics were better than average. I think there will be ongoing demand for Treasurys."

On Tuesday, the government received strong demand for its sale of $37 billion worth of 3-year notes. The U.S. will offer $15 billion in 30-year bonds on Thursday. The offerings are part of the government's quarterly refunding.

The 30-year bond plunged 1-19/32 to 95-10/32 and its yield climbed to 4.53%.

Record auctions. The government has offered record amounts of debt in recent months as it seeks to fund a $1.8 billion budget deficit and maintain its economic rescue efforts.

While participation in Wednesday's auction was not bad, many traders remain concerned that the deluge of new issues could eventually overwhelm demand for Treasurys.

The Treasury said last week that the size of U.S. debt offerings will continue rising in a "gradual manner" over the near term, and that it is working with Congress to raise its $12.1 trillion debt ceiling.

Separately, the government said the federal budget deficit grew by another $180 billion in July. The total deficit for the first 10 months of the government's fiscal year now stands at $1.267 trillion.

The 2-year note rose 1/32 to 99-22/32. Its yield was 1.15%.

The yield on the 3-month Treasury bill was unchanged from Tuesday at 0.18%.  To top of page

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