10-year bond yield drops 23 basis points; moves could cut mortgage rates to 5% SAN FRANCISCO (MarketWatch) -- Long-dated Treasurys extended their gains Tuesday, further crushing yields to historic lows, after the Federal Reserve slashed its target rate to as low as zero and repeated its intent to lower borrowing costs by buying bonds. The 10-year Treasury note rallied 1.8%, sending yields to 2.30% vs. 2.52% before the announcement and down a whopping 23 basis points for the day. That's on track for the largest one-day loss since Nov. 25, the day the Fed said it would spend up to $500 billion mortgage-backed securities and $100 billion buying bonds issued by agencies like Fannie Mae and Freddie Mac . The 30-year bond gained 2.4%, pushing yields down 2.81% vs. 2.93% before the Fed decision and 14 basis points lower for the day. The Federal Open Market Committee Tuesday afternoon established a target range of zero to 0.25% for its fed funds rate, far lower than the cut to 0.5% expected by most economists and amounting to as much as a 1-percentage point drop from its prior target rate. The FOMC also reiterated comments from Fed Chairman Ben Bernanke and other senior officials that the U.S. central bank would use methods to accelerate economic growth, particularly by buying debt to lower other market rates. "They shot the bazooka this time -- I just hope it works," said John Rocket Spinello, Treasury bond strategist at Jefferies & Co. The sharp drop in Treasury yields Tuesday marked new lows for these securities since a regular trading market emerged in the 1960s and 1970s, according to Federal Reserve data. The short-end of the curve, which had sold off ahead of the announcement, also gained. The two-year note rose 0.7%, sending yields down 9 basis points to 0.66%. Long-dated Treasurys had been rallying ahead of the decision as investors bet that the Fed would provide more information about plans to buy Treasurys, a move it hasn't made since the 1950s. In the announcement accompanying its rate-cut decision, the FOMC said the Fed would employ "all available tools" to promote sustainable economic growth. It reiterated the Fed's previous plans to "purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets," and said it "stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant." Plus, the panel said it was "evaluating the potential benefits of purchasing longer-term Treasury securities." See full story on FOMC decision. "Anchoring Treasury rates at low levels for an extended period of time is the first step in bringing down the stubbornly high private sector borrowing rates needed to get the moribund credit creation process moving again," said Max Bublitz, chief strategist at SCM Advisors, in a report. Mortgage rates headed to 5%? The Federal Reserve's aggressive moves will likely cause a short drop in conventional mortgages rates to as low as 5%, said Tony Crescenzi, chief bond market strategist at Miller Tabak. Rates on 30-year mortgages currently average about 5.5%. Plus, Crescenzi predicted a "collapse" in Libor, with the 3-month London interbank offered rate falling below 1% by early January from 1.847% currently. The central bank's commitment to lowering mortgage rates likely spurred buying of 10-year and 5-year Treasury notes, Spinello said. As mortgage rates drop and people refinance out of existing mortgages, dealers in mortgage-backed securities often replace those loans by buying Treasurys of similar origin. Also helping bonds Tuesday, a report showed U.S. consumer prices plunged 1.7% in November, the fastest pace since 1947. Economists surveyed by MarketWatch were expecting the CPI to fall by 1.4%. See full story on CPI. "People are buying into the disflation scenario," Spinello said.

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