Treasury bonds soar, yields drop on Fed plan

The interest rates on 10- and 30-year Treasurys sank sharply Wednesday after the Federal Reserve said it will buy billions in longer-term bonds. The aim is to lower long-term rates and boost the sagging economy — something super-low yields have so far failed to do.

The central bank's plan means that bond yields will remain at or near record lows for the near future. The 10-year Treasury bond hit a record low following Wednesday's announcement. It's also good news for borrowers, who could see lower rates on their next mortgage or business loan. For savers relying on interest income, the plan could hurt.

The yields on 10-year Treasury bonds have been near record lows most of the summer. Traders dumped stocks and other riskier investments because of jitters about the economy and the European debt crisis.

That increased demand for Treasurys, which carry less risk. Bonds are attractive in a volatile market because they offer predictable and safe — if modest —returns. Stocks can lose value quickly.

When demand pushes Treasury prices higher, their yields fall. The higher price eats into the return that traders can pocket.

The Fed's action puts another thumb on that scale. Buying by the central bank creates even more demand. That lifts bond prices, pushing yields lower. Traders bought 10- and 30-year Treasurys on Wednesday because the world's biggest buyer is about to enter the market.

The 10-year note yielded 1.86 percent on Wednesday. The previous record low was 1.87 percent, reached earlier this month. In late July, before fears about Europe rippled through the markets, the yield rose above 3 percent. It started the year at 3.34 percent.

With the economy still weak and Greece teetering on the edge of bankruptcy, yields are likely to remain low for some time.

The bond shifts came as stocks plunged after the Fed announcement. The Standard & Poor's 500 index fell nearly 3 percent, its worst decline in a month. The Fed's bleak economic assessment joined recent downbeat reports from the International Monetary Fund and other groups. Money flowed into lower-risk bets.

The Fed said Wednesday that it will sell $400 billion of shorter-term notes and bills to buy longer-term securities. The plan is known as Operation Twist, after a similar fed program from the early 1960s.

Lower interest rates might encourage people to invest in homes or expand their businesses. That could spur hiring and lift overall growth.

In addition to spurring investment, lower rates might make Treasurys less attractive. Traders might seek higher returns by making higher-risk bets, such as on stocks.

Analysts were skeptical about that outcome. If the economic data remain weak, demand for Treasurys will stay strong, said Peter Tchir, a former trader with the hedge fund TF Market Advisors.

"Over the next few months, the economy becomes the driver," he said.

Lower rates could encourage corporate borrowing, which has slowed in recent months as the economic picture darkened. Analysts said companies will likely take advantage of the low rates to lock in lower borrowing costs.

The government might do the same thing, Tchir said. About one-third of the Fed's buying will be of 30-yearbonds, which have little direct effect on mortgages and other loans. But lower borrowing costs could reduce the government's projected deficit.

Some official models assume that the government will pay 5.25 percent on 30-year bonds, Tchir said. The yield on the 30-year Treasury bond fell to 2.99 percent, from 3.20 percent late Tuesday. If the government can lock in lower borrowing costs, the deficit numbers might look a little less scary.

By comparison, the 30-year yield hit a 2011 high of 4.79 percent in February.

Homeowners are a key target of the Fed's move. Lower mortgage rates might help people refinance, leaving them with more money to spend elsewhere. They also reduce the cost of buying a house.

Yet record-low mortgage rates have done little to revive the moribund housing market. The rate on the 30-year fixed mortgage fell last week to 4.09 percent, the lowest on records dating to 1951.

Few people can take advantage. Many can't qualify for loans or meet higher down-payment requirements. Some with strong credit and stable jobs are hesitant to buy a house when prices are still falling.

Kevin Giddis, president of fixed income capital markets at Morgan Keegan, said lower mortgage rates do little to help Americans who are out of work, owe more than their houses are worth or feel too insecure to make a big financial move.

"If I offered you a mortgage at 3 percent, versus 3.5 percent, and you don't have a job and you're underwater on your home, does it matter to you? It doesn't," he said.

The 10-year note's yield was the lowest since the Federal Reserve Bank of St. Louis started keeping daily records in 1962. The 30-year bond's yield was the lowest since January 2009, when markets were reeling from the credit crisis that touched off the recession.

Analysts said Fed's action alone isn't enough to revive the job market or improve consumer confidence. Both are necessary for a full economic recovery.

"This is just a booster drug for a sick patient, but ultimately, the patient's immune system has to take over," Giddis said. "If we can't get some kind of a jobs bill passed, to give markets some comfort, this is a waste of $400 billion."

The price of the 10-year note rose 75 cents for every $100 invested. The 30-year rose $4.47 per $100 invested.

The yield on the two-year Treasury note rose to 0.20 percent from 0.16 percent late Tuesday.

The yield on the three-month Treasury bill was unchanged at 0.01 percent. Its discount wasn't available.