NEW YORK (CNNMoney.com) -- Treasury prices fell and yields edged higher Friday as the Federal Reserve began its debt buyback program and concerns persisted over the global economy.
Typically, these two factors would send Treasuries higher because the Federal Reserve's debt purchase program increases demand in the marketplace. And global economic woes should - in theory - increase the demand for the safety of government debt.
But the yield on the benchmark 10-year Treasury note rose to 2.79%. The yield on the 30-year long bond was up to 4.29% and the yield on the 2-year bond edged up to 0.52%. The yield on the 5-year note moved higher to 1.38%.
"There are so many cross currents in the market right now it is pretty difficult to trade and I think that is why you are getting some of these weirder kinds of results - like today," said Kim Rupert, fixed income analyst at Action Economics.
As the government runs on an ever-expanding deficit, it is constantly selling debt to finance its activities. "There is still an overhang of supply," said Rupert, citing an auction on Wednesday that was met with especially weak demand.
Also, some investors are growing concerned about inflation as the government continues to spend. "I am more convinced that the inflation scare will take over and kind of negate the Fed's attempt to push yields lower," said Rupert.
What the Fed is trying to do: To stimulate the economy, the central bank announced a week ago Wednesday that it would purchase a total of $900 billion in debt by the end of the third quarter of 2011.
The Federal Reserve made its first purchase Friday as part of the recently announced quantitative easing program, buying $7.2 billion worth of debt that is due to expire between November of 2014 and April of 2016. The central bank received offers for more than $29 billion worth of debt.
This so-called "quantitative easing" is the Federal Reserve's effort to spur the recovery. The Fed's primary method of stimulating the economy is to lower its federal funds rate, making it cheaper to borrow money. But that benchmark rate has been hovering at historic lows near zero since December 2008.
This is the second time the Fed has tried such the move recently. In November of 2008, the Fed announced a $600 billion program, which it later pumped up to $1.8 trillion, when it became clear that $600 billion wasn't big enough.
The bond market was surprised by the central bank's announcement that the majority of the scheduled purchases will be of bonds in the 2-1/2- to 10-year range. Only a very small percentage of the Federal purchases will be of bonds between 17 years to 30 years in duration.
Therefore, the 30-year longbond will likely move independently of the rest of the market.
"Increased volatility and sentiment swings are something you will likely need to get used to, either as a player or a spectator," said Kevin Giddis, president of Fixed Income Capital Markets at Morgan Keegan, in a research note. "With the Fed leaving the 30-year bond off the current QE2 buying list, the movements of this end of the curve will be forced to rely on fundamentals, volume, trends and hearsay, and that will likely mean a rollercoaster of ups and downs."
|Overnight Avg Rate||Latest||Change||Last Week|
|30 yr fixed||4.36%||4.28%|
|15 yr fixed||3.79%||3.71%|
|30 yr refi||4.33%||4.26%|
|15 yr refi||3.76%||3.69%|
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