Dec. 3 (Bloomberg) -- Thirty-year Treasury bond yields fell to record lows for a third consecutive day after the Federal Reserve said it plans to make weekly purchases of the debt of mortgage issuers to drive borrowings costs lower.

Yields have dropped every day since the central bank announced on Nov. 25 that it will buy as much as $500 billion in agency and mortgage securities of government-sponsored enterprises including Fannie Mae. Gains accelerated two days ago, when Fed Chairman Ben S. Bernanke said he would consider buying Treasuries and target long-term interest rates to combat a deepening recession.

“They’re going to be buying GSE debt and they’re going to be buying mortgage debt,” said David Ader, head of U.S. government bond strategy at RBS Greenwich Capital in Greenwich, Connecticut, one of the 17 primary dealers that trades directly with the central bank. “That’s the propellant today.”

The 30-year note yield fell one basis point to 3.17 percent at 4:15 p.m. in New York, according to BGCantor Market Data. The yield touched 3.1564 percent, the lowest since the Treasury first started selling the securities in 1977. The 4.5 percent security due May 2038 rose 10/32, or $3.13 per $1,000 face amount, to 125 9/32.

Yields have dropped 119 basis points over the last 21 days, the biggest rally since the stock market crash of 1987. Treasury 30-year bonds yielded about 9 percent in November 1987.

Ten-year note yields fell three basis points to 2.67 percent, near the lowest level since the Fed started keeping daily records in 1962. Two-year note yields were little changed at 0.89 percent.

U.S. debt returned 2 percent in the last week, according to Merrill Lynch & Co.’s Treasury Master index.

Yield Curve

The Fed said in its regional economic survey that U.S. production weakened across all regions since the middle of October as it became tougher to get loans and demand for credit shrank. A government jobs report may say Nov. 5 employers cut the most workers since the terrorist attacks of 2001.

The government has now arranged a $700 billion plan to rescue banks and an $800 billion program to buy as much as $500 billion of mortgage debt.

“It’s one thing to talk about buying long run Treasuries and it’s another to start buying them,” said Matthew Moore, an interest-rate strategist in New York at Banc of America Securities LLC, another primary dealers. “If they just talk, the 30-year yield stays above 3 percent but if they start buying out the curve they could drive rates as low as they want.”

Weekly Purchases

Richmond Federal Reserve chief Jeffrey Lacker said the central bank should not buy Treasuries. The New York Federal Reserve Bank said the central bank plans to make regular weekly purchases of Fannie Mae, Freddie Mac and Federal Home Loan Bank corporate debt.

Traders increased bets that Bernanke and his colleagues will cut interest rates at their next meeting Dec. 16 by at least a half percentage point to 0.5 percent.

Futures on the Chicago Board of Trade showed 50 percent odds the Fed will lower its 1 percent target rate by 75 basis points, rising from 38 percent yesterday. The rest of the bets are for a half-point cut.

“In the near term, mortgage rates will trend lower and the market will not fight the Fed,” said Carl Lantz, an interest- rate strategist in New York at Credit Suisse Securities USA LLC, another primary dealer. “Treasury yields will continue to fall.”

Refinance Index

The Mortgage Bankers Association’s refinance index skyrocketed 203 percent last week, the group said today. As more homeowners seek to switch out of their adjustable-rate loans, the share of applicants seeking to refinance mortgages surged to 69.1 percent from 49.3 percent of total applications in the prior week.

Investors holding mortgage securities often use Treasuries to guard against swings in interest rates, which can trigger changes in levels of expected mortgage refinancing and duration, a measure of price sensitivity to interest-rate change expressed as a number of years.

The difference between rates on 10-year Treasury Inflation Protected Securities, or TIPS, and conventional notes, which reflects the outlook among traders for consumer prices, was 41 basis points. The spread narrowed from this year’s high of 268 basis points in March.

Money-market rates suggest banks are reluctant to lend. The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, widened to 219 basis points from this year’s low of 76 basis points in May. The spread reached 464 basis points on Oct. 10, the most since Bloomberg began tracking the figure in 1984.

Relative Strength

A gauge of momentum used by traders to predict a change in price direction indicates 10-year notes are at so-called overbought levels, signaling the rally may be poised to end.

The 14-day relative-strength index for the December 10-year note futures contract reached 77.97. Readings above 70 indicate prices are likely to fall, while those below 30 indicate they’re likely to rise. The yield on the 10-year Treasury futures contract dropped to a record yesterday, losing 25 basis points since the end of last week.

To contact the reporters on this story: Dakin Campbell in New York at dcampbell27@bloomberg.net; Daniel Kruger in New York at dkruger1@bloomberg.net.

Last Updated: December 3, 2008 16:40 EST