Treasury rally widens
Yields fall as Russian minister backs the dollar, but government data show the largest holder of U.S. debt sold some holdings.
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| Click on the chart to see other government bond prices and yields. |
NEW YORK (CNNMoney.com) -- Treasury prices rose Monday after comments from the Russian finance minister confirmed the dominance of the dollar but a government report showed that China sold some of its holdings in April.
The rally in debt prices accelerated as Wall Street's sold off, with the Dow Jones industrial average losing as much as 200 points in mid-morning trade.
The benchmark 10-year note rose 22/32 to 95-6/32, and its yield fell to 3.72% after touching 4% last week. Bond prices and yields move in opposite directions.
The 30-year bond rallied 1-7/32 to 94-26/32 and its yield fell to 4.57%.
The 2-year note ticked up 3/32 to 99-10/32, and its yield fell to 1.24%. The yield on the 3-month dipped to 0.16% from 0.17%.
Foreign demand for debt: The government has been spending at a breakneck pace to jumpstart the economy out of the recession, and the unprecedented pace of spending has raised fears of inflation and an erosion of credit value in the United States.
Foreign nations have been commenting recently about the safety of government debt in recent months.
A comment from the Russian finance minister at the Group of Eight meeting in Italy indicated continued support for the U.S. dollar as the dominant reserve currency, according to reports from Reuters. Alexei Kudrin said the dollar's role would likely not change in the near term.
In the most recent Treasury International Capital report released Monday, the government said China -- the largest purchaser of U.S. debt -- decreased its holdings to $763.5 billion in April from $767.9 billion in the prior month.
Overall, foreign countries bought a net of $41.9 billion worth of Treasurys in April, down 24% from $55.3 billion in March.
Fed buyback chugs along: Another consequence of government deficit spending is the tidal wave of new debt issuance that has boosted yields and, with them, mortgage rates.
To keep a lid on borrowing rates, the government has been buying back its debt, creating demand with the long-term intention of keeping yields down.
The Federal Reserve scheduled two more purchase operations this week as it continues to march toward its $300 billion goal. On Tuesday, the government was set to buy an undisclosed amount of debt that matures between May 2012 and November 2013. On Wednesday, debt maturing between May 2016 and May 2019 was to be repurchased.
Even as the government has been buying back debt, it has been issuing new debt at an even more rapid pace. Last week, the Treasury sold a total of $65 billion in debt.
The government had a couple of shorter-maturity debt auctions this week, but the market got a breather from the longer-maturity auctions. On Thursday, the Treasury will announce the size of the 2-year, 5-year and 7-year auctions that are tentatively scheduled for next week.
Lending rates: Meanwhile, bank-to-bank lending rates have plunged to near record lows in recent weeks, an positive indication for the credit markets.
The three-month Libor rate plunged to a record low of 0.61%, down from 0.62% Friday, according to data on Bloomberg.com.
The overnight Libor rate, meanwhile, rebounded to 0.26%, where it has been holding steady for the last few weeks, after sinking to 0.21% Friday.
The London Interbank Offered Rate - or Libor - is a daily average of rates that 16 different banks charge each other to lend money. The closely-watched benchmark is used to calculate adjustable-rate mortgages. More than $350 trillion in assets are tied to Libor. 
