Treasurys gain as NY Fed eases fears about rates

Treasury prices rose Monday after the New York Federal Reserve said it was preparing to begin stepping down its economic stimulus measures while also downplaying the notion that a rate hike was near.

Bond investors have been worried that the Fed would raise interest rates from their record low levels in order to ward off inflation and shore up the value of the dollar. That would lead to lower Treasury prices and higher yields.

The New York Fed, which carries out the central bank's market operations, said in a statement Monday that it has begun testing ways it could wean the economy from monetary stimulus but that "no inference should be drawn about the timing of monetary policy tightening."

The Fed's statement reaffirmed that inflation is still not one of the government's major concerns. That's a good sign for bond traders since inflation chips away at Treasurys' fixed returns over time.

In late trading, the benchmark 10-year Treasury rose 6/32 to 101 29/32, pushing its yield down to 3.39 percent from 3.42 percent late Friday.

The advance in Treasurys, which extended gains logged Friday, came even as stocks rose. Demand for Treasurys usually tends to fall off when stocks rise as investors look to park their cash in higher-yielding assets. However in recent months both Treasurys and stocks have been able to rise simultaneously due to the massive amount of liquidity flowing through the system.

The stock market rose to new highs for the year, with major indexes gaining about 1 percent, including the Dow Jones industrials, which added 96 points. The latest push higher was driven by better earnings reports from a broad range of businesses as well as rising commodity prices.

In other trading, the 30-year bond rose 27/32 to 105. Its yield fell to 4.20 percent from 4.25 percent.

The two-year note was flat at 100 2/32, while its yield edged up to 0.97 percent from 0.96 percent.

The yield on the three-month T-bill rose to 0.08 percent from 0.05 percent. Its discount rate was 0.09 percent.

The cost of borrowing between banks was unchanged. The British Bankers' Association said the rate on three-month loans in dollars - the London Interbank Offered Rate, or Libor - held steady at 0.28 percent.