U.S. Government Bonds Steady After Fed Moves to Stabilize Markets

U.S. government bond prices held steady Thursday after the Federal Reserve added $75 billion to the financial system to stabilize short-term money markets in its third such operation this week. The yield on the benchmark 10-year Treasury note settled at 1.777%, unchanged from Wednesday. It was the first time this week that the yield didn’t decline.

Yields, which climb when bond prices increase, edged higher amid signs that the Fed’s injection of reserves had calmed markets and held down the rate that lenders were charging in the market for overnight repurchase agreements, or repos. Banks bid for $83.875 billion in reserves, $8.875 billion more than the amount offered by the Fed, using collateral in the form of Treasury and mortgage securities. The Fed said it would offer $75 billion in repos Friday. The rate to borrow cash overnight using Treasury securities as collateral surged starting late Monday as the amount of cash available to lend was exceeded by the demand to borrow it. Overnight rates reached as high as 10% Tuesday until the Fed added money into the repo market, leading to a decline in rates, traders said. The overnight repo rate for Treasury collateral was 2.25% Thursday morning, analysts said. That rate “relative to recent activity is good, but relative to the fact that the Fed cut interest rates, is not great,” said Thomas Simons, a money market economist at Jefferies Financial Group. The Fed’s repo operations “have clearly helped,” he said. With the Federal-funds rate now set at a target range of 1.75% to 2%, an overnight repo rate of 1.9% would be closer to typical during calmer market conditions, Mr. Simons said. The Fed’s cash infusion Thursday followed a decision Wednesday to lower interest rates for the second time this year, as policy makers loosened monetary policy seeking to support the economy. The WSJ Dollar Index, which measures the U.S. currency against 16 others, declined 0.1% to a recent 91.30 as investors bet that the Fed’s rate cuts would sustain the expansion in the U.S. economy, analysts said. Federal-funds futures, which investors use to bet on the direction of central bank policy, show roughly 2-in-3 odds that the central bank will cut interest rates at least once more before the end of the year, according to CME Group data. Write to Daniel Kruger at Daniel.Kruger@wsj.com

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