Treasurys rise after three-day rout

NEW YORK (AP) - Long-term Treasury prices managed their first gains in three days Friday, in a partial recovery from a rout sparked by nervousness that a sizable new U.S. rate cut will accelerate inflation.

Treasury yields were driven up to enticingly rich levels in heavy selling earlier in the week, as prices and yields move in opposite directions. Although the Treasury market remains very uneasy with the inflationary implications of the rate cut, current yield levels are attractive to investors.

The benchmark 10-year Treasury note closed 16/32 higher at 100 29/32 with a yield of 4.63 percent, down from 4.67 percent at Thursday's close.

The 30-year long bond gained 1 7/32 to 101 22/32 with a yield of 4.89 percent, down from 4.95 percent late Thursday.

The 2-year note rose 3/32 to 99 28/32 with a 4.05 percent yield, down from 4.09 percent on Thursday.

The yield on 3-month Treasury bills ended at 3.65 percent, down from 3.70 percent on Thursday, as the discount rate fell 0.08 percentage point to 3.62 percent.d

Demand for Treasurys also was stirred by remarks from Federal Reserve Vice Chairman Donald Kohn that the Fed probably would not have cut rates so much this week had housing prices continued to track higher. Signs of economic weakness tend to stir demand for Treasurys because they are low-risk and carry a government guarantee.

Many Treasury investors were startled when the Fed put in place the half percentage point cut on Tuesday. Expectations had been for a smaller quarter percentage point reduction.

Lower rates were cheered in other markets because they cheapen money and stimulate the economy. But less expensive money also tempts sellers to lift their prices, in turn stimulating inflation. The Treasury market detests inflation because it eats into the value of assets.

Despite Friday's price gains, T.J. Marta, a fixed-income strategist at RBC Capital Markets, predicted that market action in coming sessions will be dominated by the "curve steepening" moves that largely have driven trade since the Federal Reserve cut rates.

"We are mainly seeing selling of the longer-dated maturities," Marta said.

Under a curve steepening strategy, investors put heavy selling pressure on the 30-year long bond and other longer-dated maturities and less pressure on shorter-term assets such as the 2-year note.

The result is that there is a bigger difference between the yields of longer- and shorter-term assets, which restores the motive for lending money for longer periods. These market plays also are a signal that fixed-income market investors expect both higher inflation and further rate cuts.

Heavy selling of Treasurys on Tuesday, Wednesday and Thursday sent yields 3.5 percent higher for the 10-year note and 3.8 percent higher for the 30-year bond on the week, given that price losses fatten yields. These are unusually big moves for Treasury yields and they reflect the fixed-income market's preoccupation that inflation will be exacerbated by rate reductions.

"It has been quite a week and it appears that the back and forth volatility will continue for the days and weeks ahead until the Federal Open Market Committee next meets at the end of October," said Kevin Giddis, managing director of fixed income at Morgan Keegan & Co.