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U.S. 10-Year Notes ‘Cheap’ as Fed Holds Rates, FTN’s Vogel Says

The Federal Reserve’s promise to keep borrowing costs near zero through 2013 suggests Treasury 10-year notes remain a good value even as yields are almost at historic lows, according to FTN Financial.

The Fed’s commitment indicates that while the economy is poised to remain weak for a significant period, the Fed is also unlikely to raise interest rates quickly once signs of improvement start to appear, said Jim Vogel, head of agency-debt research at FTN in Memphis, Tennessee, today in a telephone interview.

“Once things are better, how fast is the Fed going to want to move to dampen the enthusiasm for a stronger economy,” Vogel said. “The 10-year is a little cheap as it hangs around 1.9 percent.”

Treasury yields have plunged since July 28 when the 10-year note closed at 2.95 percent after a Commerce Department report showed that the economy almost stalled in the first six months of 2011, prompting economists to lower their forecasts. Yields on Treasury notes maturing seven years and less fell to record lows after the Fed on Aug. 9 said it would hold rates near zero for at least two more years.

Yields on 10-year notes fell 12 basis points, or 0.12 percentage point, to 1.79 percent at 2:02 p.m. in New York, according to Bloomberg Bond Trader prices.

The Fed bought $2.5 billion of Treasuries maturing from February 2036 through August 2041, according to a New York Fed statement today.

The purchases are the first under a program announced Sept. 21 to acquire $400 billion of bonds with maturities of six to 30 years through June while selling an equal amount of debt maturing in three years or less to keep borrowing costs down.

“The market is eventually going to start thinking about roll-down possibilities,” which were formerly concentrated around the five-year part maturity, Vogel said. “You’re going to start thinking about the projected valuation of Treasuries out into this longer horizon, knowing the Fed’s biases as it tried to manage monetary policy.”

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