Bump-up in Fed discount rate boosts bond yields

Bump-up in Fed discount rate boosts bond yields
It's only a modest boost in the emergency lending rate. But the Fed's small hike in the discount rate speaks volumes about the big picture.
FEB 18, 2010
Interest rates rose for a second day in the bond market after signals the economy is strengthening pushed traders into riskier assets. Yields on Treasurys extended their gains after the Federal Reserve raised its rate on emergency loans to banks. The move had been expected, but investors now anticipate that policymakers will begin to withdraw more of the supports put in place in the last three years to stabilize the economy. Treasury prices, which move opposite to their yields, had already been falling Thursday after the Philadelphia Federal Reserve said its index of regional manufacturing rose to 17.6 in February from 15.2 in January. That came after two other reports this week indicated that production at U.S. factories is increasing. The yield on the 10-year Treasury note maturing in February 2020, which is a basis for rates on mortgages and other consumer loans, rose to 3.81 percent in late trading from 3.74 percent Wednesday. Its price fell 19/32 to 98 16/32. An increased sense that the economy is expanding had caused a steepening of the difference between short- and long-term interest rates, known as the yield curve. During the day that spread reached another record. The Fed's move to lift its rate on emergency loans to banks helped flatten the yield curve. That's because short-duration interest rates are the most sensitive to interest rate changes. The Fed said the increase to what is known as the "discount" lending rate by one-quarter point to 0.75 percent is not a sign that it will soon raise rates for consumers and businesses. The change takes effect Friday. The Fed had telegraphed its intentions in recent statements, but the shift still helped boost short-term rates. "Up until today the Fed was steadfast about keeping short-rates low," said Kevin Giddis, managing director of fixed income at Morgan Keegan in Memphis. The yield on the two-year note that matures in January 2012 jumped to 0.95 percent from 0.86 percent and its price slid 5/32 to 99 28/32. The drop in Treasury prices also came as investors bought stocks for a third straight day. The Dow Jones industrial average has jumped nearly 300 points in the past three days, its best streak since November. The yield on the 30-year bond that matures in February 2040 rose to 4.74 percent from 4.70 percent. The price fell 20/32 to 98 6/32. The yield on the three-month T-bill that matures May 20 fell to 0.08 percent from 0.09 percent. Its discount rate was 0.09 percent.

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