NEW YORK -- Shorter-dated U.S. Treasuries rose Wednesday as persistent worries about a widening credit squeeze fed investors' appetite for safe-haven government debt, sending yields on some maturities to 18-month lows.
Gains were held in check, though, after earlier data on inflation did little to change the outlook for a benchmark interest rate cut and as U.S stock markets held near the unchanged mark following the previous session's big sell off. With stocks steadier, bonds settled into narrow-ranged trade.
"Treasury traders have their eyes glued to the stock market's gyrations," said Chris Rupkey, vice president and senior financial economist at Bank of Tokyo/Mitsubishi. "Governments are trading one for one with stocks."
Two-year Treasury note yields — at 4.33 percent, down from 4.36 Tuesday — were still more than 90 basis points below the Federal Reserve's 5.25 percent target for its benchmark federal funds rate, the furthest below a Fed target rate that they have traded in nearly six-and-a-half years. Bond prices and yields move inversely.
Yields on both the two-year notes and three-year notes , the so-called front-end of the yield curve, were at their lowest since January 2006. Three-year notes were 2/32 higher with the yield at 4.355 percent versus 4.382 percent late the day before.
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Longer-dated maturities were underperforming, however.
Benchmark 10-year note prices were unchanged, their yields at 4.726 percent, versus 4.72 percent late Tuesday. Thirty-year bonds, were down 11/32, their yields rising to 5.007 percent from 4.98 percent Tuesday.
"Yield curve steepening trades are the dominant feature today as the Federal Reserve continues to pour money into the market," said Rupkey. "At 4.75 percent, the fed funds rate is way below the Fed's 5.25 percent target, due to the Fed's reserve injections that began in earnest last Friday."
The Fed manually added $7.0 billion in temporary reserves to the banking system through overnight repurchase agreements on Wednesday after it said a technical problem led to the cancellation of an initially announced operation.
Interest-rate futures, meanwhile, implied an October yield of 4.935 percent, a 25-basis-point Fed rate cut and about a 25-percent chance of a 50 basis-point cut.
"These are growing pains for the market in the sense that the market for derivatives and the willingness to provide funds on the basis of securities that were not fully understood now has the recognition of reality setting in," said Pierre Ellis, senior economist at Decision Economics in New York.
Data on inflation and manufacturing released Wedmesday did little to alter the landscape of Fed policy.
"The July CPI readings (didn't) make it any harder or easier for the Fed to cut interest rates," said Richard Huber, economist at A.G. Edwards and Sons in St. Louis, Missouri.
Meanwhile, industrial production offered evidence of "a broad manufacturing rebound," said Ellis, "suggesting that the domestic economy has a lot of resilience.
"(That) should make the Fed more comfortable about hanging tough in this environment," he said.
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