NEW YORK (MarketWatch) -- Treasurys advanced Tuesday, sending yields lower, as U.S. equities weakened in the wake of disappointing earnings reports.
Two-year note yields fell 5 basis points, or 0.05%, to yield 1.60%. Yields move in the opposite direction of prices.
Treasurys pared earlier, steeper gains as equities recovered somewhat. See Market Snapshot.
In mid-morning trading, Treasurys also gave up some earlier gains after the Federal Reserve released results of Monday's Term Auction Facility. The results are watched by investors for hints about the health of U.S. financial institutions.
The Fed made $113.27 billion in 28-day loans at a rate of 1.11%. That's 2.64 percentage point lower than the market rate for one-month dollar loans, known as the London interbank offered rate, on Monday.
The Fed received 76 cents in bids for every dollar available, compared to 92 cents in the last TAF of the same amount on Oct. 6. The two auctions were the only ones not to receive enough bids for the full amount made available, or $150 billion, indicating the Fed is finally proving enough funding to meet the market's needs.
The Fed also gave an unlimited amount of funds to certain foreign central banks to conduct similar auctions today in an effort to flood short-term lending markets with liquidity and bring down borrowing costs.
Three-month Libor fell Tuesday to its lowest level this month, to 3.83% from 4.06% the previous day. The decline follows a sharp drop of about 35 basis points on Monday.
Meanwhile, the overnight dollar lending rate plunged below the U.S. Federal Reserve's official federal funds rate of 1.5% for the first time in more than a year, declining to about1.28% from 1.51% on Monday. That's also the lowest since 2004.
Fed futures
Futures traders raised bets that the Fed will lower its target interest rate next week.
Traders have priced in a 78% chance of a 50-basis point cut from the current 1.5% rate on Oct. 29. Futures also show a high probability of another cut of at least a quarter-percentage point in December.
Investors also pointed to the Bank of Canada's decision to lower its benchmark rate Tuesday, recognizing the slowing of economic growth in that country. The central bank lowered its target interest rate by a quarter of a percentage point to 2.25%, less than the half percentage point cut some analysts predicted.
"If they ease again today it does add a degree of credibility for a Fed follow through next week," RBS Greenwich Capital strategists wrote in a note.
Treasurys remained higher after the Fed announced details about a new program, called the Money Market Investor Funding Facility, to provide funds to a private-sector controlled effort to purchase assets from U.S. money market mutual funds.
