By Dakin Campbell Dec. 17 (Bloomberg) -- Treasuries of all maturities touched record lows amid concern the Federal Reserve’s actions show the 16-month credit crisis is far from over, stoking demand for the safety of government debt. U.S. 10- and 30-year securities outperformed shorter-term Treasuries as investors sought higher returns after the Fed said it will keep long-term interest rates suppressed for “some time.” The central bank pledged to buy “large quantities” of agency and mortgage-backed securities and said it will consider purchasing government debt. “You’ve seen such a powerful move in the market because people are reaching for yield,” said Tom Tucci, head of U.S. government bond trading in New York at RBC Capital Markets, the investment-banking arm of Canada’s biggest lender. “This economic downturn and credit situation will continue to unwind over the next few years.” The yield on the 10-year note tumbled 14 basis points, or 0.14 percentage point, to 2.12 percent at 10:28 a.m. in New York, according to BGCantor Market Data. It touched 2.0711 percent, the lowest level since the Treasury began providing daily data on the securities in 1962. The price of the 3.75 percent security due in November 2018 rose 1 9/32, or $12.81 per $1,000 face amount, to 114 1/2. The 30-year yield dropped nine basis points to 2.62 percent after touching 2.5816 percent, the lowest since sales of the security began in 1977. Two-year yields fell two basis points to 0.62 percent. They touched 0.6044 percent, the lowest level since the Fed began selling the notes in 1975. Rates on one-month bills were minus 0.02 percent, the second straight day the shortest government securities have offered a negative return. Zero Interest Rate The Fed yesterday cut interest rates to a range of between zero and 0.25 percent and said in a statement it “will employ all available tools” to promote economic growth. The central bank also said it will purchase longer-term securities to drive borrowing costs lower. “The fact that the Fed will be a default buyer means people won’t be shorting this market,” said Nick Stamenkovic, a fixed-income strategist in Edinburgh at RIA Capital Markets, a securities broker for banks, wealth managers and institutional investors. A short position is a bet that a security will fall. The 10-year yield may drop below 2 percent before the end of the month, Stamenkovic said. The notes yielded as much as 4.29 percent Dec. 26 of last year, when two-year Treasuries yielded 3.30 percent. Treasury Buys ‘Unlikely’ While the central bank said it is considering buying Treasuries, policy makers will likely avoid purchasing government debt, according to RDQ Economics LLC. “This step is still an unlikely one for the Fed to take, since it is trying to narrow the spread between mortgage-backed securities and Treasuries,” John Ryding and Conrad DeQuadros, founders of New York-based RDQ, wrote in a note yesterday. Fannie Mae 30-year current coupon mortgage bonds yield 1.49 percentage points more than the benchmark 10-year Treasury note, down from 1.62 percentage points yesterday. The spread reached 2.38 percentage points March 6. The difference in yield, or spread, between two- and 10- year notes fell 11 basis points to 1.50 percentage points, the narrowest the so-called yield curve has been in more than three months. “People anticipated that if the Fed ever did get to this place, with the fed funds rate at zero, the curve would be steep,” RBC’s Tucci said. As a result, they are now making bets on a flatter curve “out of necessity rather than choice.” Treasuries to Gain Treasuries will appreciate over the next six months as the U.S. economy reels from its worst recession in a quarter- century, a monthly survey of Bloomberg users showed. Participants turned the most bullish on 10-year Treasury notes since February, according to the Bloomberg Professional Global Confidence Index. The survey questioned 2,991 Bloomberg users last week. “In general the trend will stay in place until the data improves enough that you get the sense that the Fed policy will shift away from agency and mortgages purchases,” said Carl Lantz, an interest-rate strategist in New York at Credit Suisse Securities USA LLC, said. The firm is one of the 17 primary dealers that trade with the Fed. Best Return Since 1995 Treasuries of all maturities have gained 13.7 percent this year, according to Merrill Lynch & Co.’s Treasury Master Index. It is the best annual performance since 1995, when U.S. government securities gained 18.5 percent after the Fed halted a series of interest-rate increases that pushed the central bank’s target rate to 6 percent from 3 percent the year before. For all their efforts to thaw credit markets, the Fed and the Treasury show no signs of ending the 18-month freeze. The difference between the London interbank offered rate, or Libor, that banks charge each other for three-month loans and Treasury bill rates is almost seven times wider than before markets began to seize up. The so-called TED spread was 1.57 percentage points, up from a two-year low of 0.18 percent. The U.S. current-account deficit narrowed more than forecast in the third quarter to $174.1 billion, reflecting gains in exports and decreases in foreign earnings on American assets. The shortfall, the broadest measure of trade because it includes transfer payments and investment income, was the smallest since the last three months of 2007, the Commerce Department said today in Washington. To contact the reporter on this story: Dakin Campbell in New York at dcampbell27@bloomberg.net.

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