Aug. 3 (Bloomberg) -- Treasuries rose, pushing the two-year note yield to a record low, on speculation the Federal Reserve may be forced to resume buying bonds to keep the economic recovery on track. “The bid is increasing in strength due to the concern from the deflation camp and possible policy changes out of the Federal Reserve,” said Christian Cooper, senior rates trader in New York at Jefferies Group Inc., one of the 18 primary dealers that trade directly with the central bank. “Until we get through the Fed and employment and get more information, we will see more of the same sentiment.” The yield on the benchmark 10-year note fell three basis points, or 0.03 percentage point, to 2.93 percent at 9:04 a.m. in New York, according to BGCantor Market Data. The price of the 3.5 percent security maturing in May 2020 rose 7/32, or $2.19 per $1,000 face amount, to 104 25/32. The two-year note yield dropped two basis points to 0.54 percent after sliding to a record low for a third straight day, touching 0.522 percent. The 10-year note yield earlier slid to 2.89 percent, the lowest since July 22. Fed’s Bond Buying The Fed will consider at its meeting on Aug. 10 whether to use cash it receives when its holdings of mortgage bonds mature to buy new mortgage or Treasury bonds, the Wall Street Journal reported today. The central bank should resume purchases of U.S. debt securities if the economy slows and prices fall rather, St. Louis Fed President James Bullard said in a research paper released on July 29. “Whether the Fed will use proceeds from their maturing securities to purchase Treasuries is dominating trading action,” said Dan Greenhaus, chief economic strategist at Miller Tabak & Co. in New York. “The economic data provide color, but much of the weakness is already known and secondary to the Fed speculation.” U.S. policy makers used purchases of Treasury, housing- agency and mortgage-backed securities to spur growth after cutting the benchmark interest rate to a range of zero to 0.25 percent in 2008. The Fed’s asset purchases increased the size of its balance sheet to a record $2.35 trillion in May from $900 billion two years earlier. Personal Income An index of contracts in the U.S. to buy previously owned homes probably rose 4 percent in June, according to the median forecast before a report from the National Association of Realtors. Expiration of a government tax credit on April 30 caused the gauge to drop 30 percent in May, the most since data began in 2001. The Treasury is scheduled to announce tomorrow the sizes of 3-, 10- and 30-year auctions next week. President Barack Obama is borrowing unprecedented amounts as he tries to sustain the expansion, boosting publicly traded debt to $8.1 trillion. --Editors: Dennis Fitzgerald To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Lukanyo Mnyanda in London at lmnyanda@bloomberg.net To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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