Treasurys fall as Fed plans to ease debt purchases

NEW YORK -- Long-term Treasurys fell Wednesday after the Federal Reserve said it would wind down its purchases of government debt and as a surge in stocks lured investors away from safe-haven assets.

Investors moved out of Treasurys, sending yields higher after the central bank said it would slow its buying of government debt in the coming weeks in order to hit its target of purchasing $300 billion in Treasurys by the end of October. The Fed's more upbeat tone on the economy, meanwhile, spurred buying in the stock market, further chipping away at demand for the safety of Treasurys.

The central bank said economic activity is leveling out and that there would be "a gradual resumption of sustainable economic growth." As expected, the Fed left its federal funds rate at a record low of near zero.

Following the Fed's announcement, and as the Dow Jones industrials soared 120 points, the benchmark 10-year Treasury note fell 12/32 to 95 4/32, driving its yield up to 3.72 percent from 3.67 percent late Tuesday.

The Fed has committed to buying $300 billion of Treasurys this year to help offset the overwhelming amount of debt being sold to fund the government's economic stimulus programs. Investors have been concerned that at some point, demand for government debt, especially from foreign investors, will diminish. The fact that the Fed, come October, will no longer help counteract some of the supply coming to market is a concern to investors, although many have expected the central bank to start scaling back its purchases.

If demand were to fall considerably, the government would have to raise the interest it pays, which would prematurely drive up borrowing costs at a time when consumers are still struggling. The yield on the 10-year Treasury note is closely tied to interest rates on mortgages and other consumer loans.

This week, the Treasury Department is issuing $75 billion of debt. The final auction is Thursday, when the government issues $15 billion in 30-year bonds.

The 10-year auction's bid-to-cover ratio, a measure of demand, was 2.49 percent, down sharply from 3.28 percent at a similar auction in July, but relatively in line with recent levels.

Indirect bids, an indication of foreign buying, were lower than at recent auctions.

The yield at which the notes were offered was slightly higher than the yields of already issued 10-year notes, another sign that demand was weak.

"As a rule of thumb, uncertainty creates higher premiums, so the Treasury had to offer a higher premium to attract buyers," said Chris Bury, managing director and co-head of rates trading and sales at Jefferies & Co.

In other trading Tuesday, the 30-year bond fell 1 21/32 to 95 7/32, and its yield rose to 4.54 percent from 4.44 percent.

The two-year note rose 1/32 to 99 22/32 and its yield slipped to 1.16 percent from 1.18 percent.

The yield on the three-month T-bill was unchanged at 0.17 percent. Its discount rate stood at 0.18 percent.

The cost of borrowing between banks also held steady. The British Bankers' Association said the rate on three-month loans in dollars -- the London Interbank Offered Rate, or Libor -- stood at 0.45 percent.

Treasurys had been rising in the first part of this week as nervous investors took their money out of stocks and looked to park their money in safer assets like government bonds ahead of the Fed meeting.

A successful auction of three-year notes on Tuesday further supported Treasurys.