DECEMBER 13, 2010, 5:48 P.M. ET.

Treasurys Rebound as Fed Buys

By DEBORAH LYNN BLUMBERG

NEW YORK—Treasurys rallied Monday, recouping some ground after a sharp selloff in the previous week, as recent selling turned government bonds into an enticing bargain for investors.

Gains also came as the Federal Reserve completed its first purchase of Treasury securities for the week, buying nearly $8 billion in Treasurys. Traders said bond yields had reached levels that looked enticing to buyers after the prior week's sharp move up in yield, sparking purchasing by foreign central banks. Early Monday, the 10-year yield hit a 3.395% high, a level last seen in June, pulling buyers in.

In afternoon trading, the 10-year was up 9/32 to 3.282%. The two-year added 2/32 to 0.604%

The five- and seven-year notes were outperforming, up 13/32 to yield 1.900% and up 17/32 to 2.630%, respectively. The seven-year yield had risen by 1.00 percentage point since early November, a move that proved attractive.

"It's a snap back from the overwhelming selling" last week, said Chris Bury, co-head of rates trading and sales at Jefferies & Co. in New York about Treasurys' rally at the start of the week. "It looks like [prices] have hit their near-term bottom."

The Fed on Monday morning bought $7.790 billion in Treasury securities maturing in next six to seven years; $18.29 billion in offers were submitted. Purchases were more evenly distributed across the notes the Fed bought in the bond-buying operation than in past operations, catching some Treasury traders short, Mr. Bury said, and sparking buying.

More
Dealers See Higher '11 Yields
.That yields dropped after the Fed operation comes as good news for policy makers, whose goal is to keep rates low to help the economy. Rates have thus far risen since the Fed kicked off its second bond-buying program, or quantitative easing effort, known as QE2.

The Fed, in its final policy meeting of the year Tuesday, isn't expected to make any material changes on its bond-buying program or economic outlook, in which meaning case Treasury prices should stay range bound, traders said.

"The market is expecting the Fed to be very consistent," said Mr. Bury, "and maybe a shade towards the dovish side." Dovish, in bond-market parlance, means the Fed would play down its concern about inflation, keeping the stage set for a prolonged period of unchanged fed funds.

There is a risk, however, that the Fed could increase its optimism about the economic outlook, which would weigh on Treasurys, which tend to perform well amid downbeat economic news. A cheerier growth outlook would spark speculation that the Fed may remove stimulus sooner rather than later.

Gains on Monday chipped away at losses chalked up last week—the 10-year Treasury yield, which moves inversely to its price, had its biggest weekly rise last week since 2009.

In general, Treasury prices have been trending lower, and yields higher, since early October amid better-than-expected global data. Investors are hopeful that the economic recovery in the U.S. will be able to withstand friction from the fiscal troubles in the euro zone.

In the longer term, most market participants believe Treasury rates have room to rise even more as the recovery gains traction. In the near term, however, the market could do well, especially as year-end buying dominates trading. Investors typically load their balance sheets with low-risk Treasurys into year-end for accounting purposes.

"The Fed is still buying, inflation remains tame, Europe is in a state of flux" and the labor market is still weak, said Kevin Giddis, president of fixed-income capital markets at Morgan Keegan & Co. in Memphis. "So don't give up on bonds yet."

Mr. Bury said the 10-year Treasury yield could be knocked back down to a 3.15% to 3.20% level heading into year's end.

Write to Deborah Lynn Blumberg at deborah.blumberg@dowjones.com

http://online.wsj.com/article/SB1000142 ... 04974.html