TREASURIES-Two-yr yield hits record low, 30-yr lags on QE2

* Two-yr yield hits record low of 0.3316 pct

* Long end of yield curve beyond 10-year sector steepens

* Five-yr/30-yr yield spread hits record wide above 297 bps

* 30-yr sector underperforms as investors brace for inflation

By Masayuki Kitano

TOKYO, Nov 4 (BestGrowthStock) – The long end of the U.S. Treasury
yield curve steepened on Thursday and the five-year/30-year rate
spread widened to record levels as investors bet that a fresh
round of quantitative easing by the Fed would stoke future
inflation.

The two-year yield dipped to a record low after the Federal
Reserve said it would buy $600 billion more in Treasuries by the
middle of next year, and reiterated that economic conditions are
likely to warrant exceptionally low levels for the federal funds
rate for an extended period. [ID:nN03120542] [ID:nTAR001672]

“The Fed is pulling out all the stops to boost the economy,
including opening Pandora’s box,” analysts at Rabobank said in a
research note. “The big question is whether the Fed will be able
to prevent an economically devastating inflationary spiral in the
long term.”

There is “considerable risk” that the second round of
quantitative easing may be extended, as the economy’s recovery
could continue to disappoint well into 2011, the Rabobank
analysts added.

Thirty-year Treasuries dipped 1/32 in price to yield 4.053
percent (US30YT=RR: ), up roughly 1 basis points from late U.S.
trading on Wednesday.

Five-year Treasuries rose around 6/32 in price to yield 1.077
percent (US5YT=RR: ), dipping about 3 basis points on the day, and
the five-year/30-year yield spread widened to record levels above
297 basis points following the Fed’s decision.

Benchmark 10-year Treasuries rose about 7/32 in price to
yield 2.552 percent (US10YT=RR: ), down about 2 basis points from
late New York trade, and the 10-year/30-year yield curve widened
to around 150 basis points.

Two-year Treasuries were little changed in price to yield
0.336 percent (US2YT=RR: ), having touched a record low of 0.3316
percent earlier on Thursday.

The Fed’s strategy is to prevent a slide in inflation from
becoming a deflationary spiral of falling wages, growth and
business activity, and market players say a dramatically steeper
yield curve may be the new norm. [ID:nN03144466]

“It’s outside of the 10-year note that steepened,” said a
trader for a European brokerage house.

“People are expecting that maybe it will be successful by
introducing inflation … The forwards certainly tell you that,”
he said, referring to the Fed’s latest asset buying scheme.

“For example, the 10-year note right now is 2.55 percent but
the 10-year note five-years forward is up 160 basis points. It’s
at 4.20 percent,” he added.

The fact that the average maturity of the Fed’s new
Treasuries purchases will be between five and six years,
contributed to the underperformance of the 30-year sector and the
curve steepening, analysts said. [ID:nN03121393]

“The 10s 30s curve had flattened recently despite the steady
richening of the belly as some anticipated that the Fed would
increase purchases in the long-end, which did not materialize,”
analysts at Barclays Capital said in a research note.

“We would not recommend fading the move as the curve has now
only come in line with the richness of the belly,” they said.
(Editing by Joseph Radford)

TREASURIES-Two-yr yield hits record low, 30-yr lags on QE2