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Long-term bonds slip after Fed cuts rates

January 31, 2008 | "CNNMoney"

Prices of 10- and 30-year Treasurys ease after the central bank announces a half-percentage point reduction in a key interest rate.

Treasury prices edged lower Wednesday afternoon after the Federal Reserve announced its decision to lower interest rates in response to growing fears of a U.S. recession.

The central bank cut both the federal funds rate and the discount rate by a half-percentage point. The fed funds rate now stands at 3% and the discount rate is now down to 3.5%. The Fed indicated in its statement that it will cut rates further if necessary.

Last week, the Fed announced an emergency rate cut of 0.75 percentage points, reducing the overnight Fed funds rate to 3.5%.

The news helped move stocks higher, as investors shifted money from the relative security of government-backed bonds to more volatile equity investments in light of the Fed's accommodation.

Early Wednesday, the Commerce Department reported that the nation's gross domestic product, the broadest measure of the nation's economic activity, grew at an annual rate of 0.6%, adjusted for inflation, in the fourth quarter, down from 4.9% in the final reading of growth in the third quarter. Economists surveyed by Briefing.com had forecast GDP would slow to a 1.2%.

The report raised fears that the economy is headed for a recession, or is already in one, and supported the notion that the Fed will cut interest rates again.

Also on Wednesday morning, The Treasury Department said it will sell $22 in debt at its quarterly auction next week. The department said it will auction $13 billion in 10-year notes on February 6 and $9 billion in 30-year bonds on February 7.

Speculation about a Fed rate cut has caused the 2-year note to be unusually volatile recently. The yield slid to a four-year low last week, as traders became more confident that the Fed would slash rates dramatically.

But the yield on the 2-year note crept higher in the previous session as traders became less certain that the central bank would act as aggressively as previously thought.

The 2-year note rose 6/32 to 99 27/32 with a yield of 2.19%, down from Tuesday's 2.29%. Prices and yields move in opposite directions.

The 10-year benchmark note fell 7/32 to 104 21/32 with a yield of 3.67%, up from 3.66% late Tuesday.

The 30-year long bond fell 14/32 to 109 29/32 with a yield of 4.39%, up from 4.34% late Tuesday.

The dollar rose against the euro and fell versus the yen.

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