

Rates, which rise as the price falls, have risen lately as investors avoid U.S. government debt—including a new 30-year bond auctioned on Wednesday. That has generated market anxiety that the Federal Reserve has lost control of rates and inflation expectations.










The weakness in the 30-year bond is not terribly surprising. The Fed has said it won't buy much 30-year debt. It stuck by that commitment in Wednesday's schedule, dedicating just about 4% of its purchasing power to longer-dated bonds.

Still, the 10-year Treasury note, which will get much more Fed attention, has suffered, too. Since Aug. 26 , the 10-year note yield has risen to 2.657% from 2.50%.

The 10-year yield is of more practical importance to the Fed, given its influence on mortgage rates and other borrowing costs.

Some argue that the rising interest rates are a sign that the Fed may be doing too much and that inflation will come more quickly than it wants.

"Credibility is essential for a central bank to achieve its goals, and it appears the interpretation of the Fed's intentions has already rendered such activity ineffective," Russ Certo, co-head of rates trading at Gleacher & Co., said in a note, "and this is before it has even started."

Still, the 10-year note yield is lower than at the end of October, just before QE2 was announced.

And while the 30-year bond is in far worse shape, it is not certain how much Fed policy makers care. The Fed appears to have made a deliberate effort to buy less 30-year debt under QE2 than it did under the first QE, according to Mr. Ader's estimate.

The 30-year bond has little impact on consumer and corporate borrowing costs. At the same time, higher 30-year rates could be a boon to pension funds and other investors that buy and hold such debt. It also can benefit banks, which make more money when long-term interest rates are significantly higher than short-term rates.

And leaving the 30-year bond to fend for itself could give policy makers a coal mine canary that will warn them of surging inflation expectations.

As for shorter-dated Treasury bonds, the sheer bulk of the Fed's buying power could be enough to keep their prices high and yields low.

"The Treasury is making them, but the Fed is buying them all," said Tom di Galoma, head of fixed-income rates trading at Guggenheim Partners. He expects the 10-year yield to fall to 1.75% by mid-2011, due to Fed purchases and a sluggish economy.

At least some of the recent declines in Treasurys has to do with the roughly $42 billion in new corporate-bond issuance since the Fed's QE announcement, according to data provider Dealogic. These compete with lower-yielding Treasury bonds, and some investors essentially short Treasurys to hedge their corporate-bond purchases.

Nevertheless, the Fed might not be able to ignore interest rates rising, or its own credibility being questioned, for too long. It could yet buy more 30-year debt if that yield gets too high, suggested Brian Yelvington, fixed-income strategist at Knight Capital, lest it "lose control of the entire ship."

Write to Mark Gongloff at