Treasurys Mixed; Fed Sees Tame Inflation

NEW YORK (AP) -- Treasury prices closed mixed Tuesday, drawing some support from a benign Federal Reserve forecast for 2008, but with gains limited by growing credit worries and light volume ahead of Thanksgiving.

A new Fed economic outlook, the first in a quarterly series, predicted tame inflation and slow growth in 2008, a nearly ideal combination for the government bond market.

Benign inflation would protect the value of fixed-income assets and remove the rationale for the Fed keeping rates higher. The fact the Fed also foresees growth in the 1.8 percent to 2.5 percent range in 2008, slower than previously thought, gives a motive for cutting rates.

The Fed separately released minutes from its Oct. 31 monetary policy meeting that showed that some of its monetary policy committee members considered market conditions "still fragile," and were more worried about weak growth than inflation.

"The combination of minutes and estimates leave the door open for further rate cuts ahead," said Action Economics.

Still, the Fed said some officials believed the 0.25 rate cut they implemented Oct. 31 was a "close call," and that phrasing sent stock prices falling, although Wall Street ultimately closed mostly higher.

The benchmark 10-year Treasury note rose 7/32 to 101 1832 with a yield of 4.05 ercent, down from 4.07 percent late Monday. The benchmark yield this week fell below 4.1 percent for the first time since early September, 2005.

The 30-year long bond finished unchanged at 108 14/32 with a yield of 4.48 percent, unchanged from late Monday.

The 2-year note closed unchanged at 100 27/32 with a 3.16 percent yield,also unchanged from late Monday.

Selling in after hours trade sent some yields higher, with the benchmark yield rising to 4.09 percent at 5:30 p.m. Eastern time from 4.05 percent at the 3 p.m. close, while the 30-year yield remained at 4.48 percent. The 2-year yield rose to 3.19 percent from 3.16 percent.

Two rate cuts totaling 0.75 percentage points in September and October for a time restored confidence and liquidity to capital markets badly shaken by defaults on mortgage debt. However, recent disclosures by many banks of billions of dollars in new losses from exposure to low-quality mortgages have left investors dispirited again.

Unverified rumors that Countrywide Financial Corp. will be forced into bankruptcy and news that home lender Freddie Mac posted a $2 billion quarterly loss helped cause erratic price activity in the stock market.

Treasury price gains Tuesday also were limited by slow trading ahead of Thanksgiving and the tendency of investors to lighten bond holdings ahead of holidays.

"Traders are looking to take a few profits off the table as well as reduce their inventories going into the Thanksgiving holiday," said Kevin Giddis, managing director of fixed income at Morgan Keegan.

There was little reaction to news that construction of new homes and apartments rebounded 3 percent in October, the largest gain in eight months. The report was not viewed as a sign that the badly wounded housing sector has begun a turnaround because permits for new construction plunged a full 6.6 percent, foreshadowing slower building ahead.