Federal Reserve bond-buying debate still dominates trading By Deborah Levine, MarketWatch NEW YORK (MarketWatch) — Treasury prices advanced Thursday, pushing 10-year yields down from their highest level in more than a month, as traders hoped for good demand at the government’s final auction of the week. Yields on 10-year notes (UST10Y 2.67, -0.06, -2.09%) , which move inversely to prices, fell 4 basis points to 2.68%. A basis point is 0.01%. Yields on 2-year notes (UST2YR 0.38, -0.04, -8.38%) declined 4 basis points to 0.38%. The record low, set on Oct. 12, was 0.33%. Thirty-year bond yields (UST30Y 4.04, -0.02, -0.42%) turned back down by 1 basis point to 4.05%, after trading as low as 4.02% earlier. The session’s rebound follows a recent steep decline that erased most of the rally since the Federal Reserve’s most recent policy meeting on Sept. 21. At that meeting, officials sent the first of several signals that they intended to restart buying Treasury bonds on a large scale soon. Investors widely expect the Fed to announce a second round of so-called quantitative easing at its meeting next week, which ends Nov. 3. Many expect the central bank to say it will buy $250 billion to $500 million over the next several months, and some economists have said the U.S. central bank could end up buying as much as $2 trillion over the long term. “The debate about the size ... is still in the forefront of Fed discussions and next week’s meeting can’t come soon enough,” said Kevin Giddis, president of fixed-income capital markets at Morgan Keegan. After the September meeting, bonds rallied, as benchmark 10-year yields sank to the lowest level since January 2009 earlier this month. That rally has been completely erased, however, with yields back up to where they stood before that meeting. Thirty-year yields rose to 4.08% earlier — the highest since early August. The longest-dated bonds sold by the U.S have been excluded from the rally because they’re more sensitive to inflation expectations. Many investors worry that more quantitative easing by the Fed will eventually trigger a big rise in prices, eroding the value of fixed payments on bonds. Some traders have reversed bets that Treasurys will fall more, Giddis said. Also, yields on some maturities, including the 7-year note, have moved back up to levels that are proving attractive. Auction on tap The Treasury Department will accept bids on $29 billion in new 7-year notes (UST7YR 1.96, -0.08, -4.01%) until 1 p.m. Eastern time. Higher yields after the recent selloff should help make the new debt more appealing, analysts said. ”The more general bearish trend over the last several days means that we should likely see a fair 7-year auction,” said George Goncalves, a bond strategist at Nomura Securities.

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