Treasurys Rally As Fed Cuts Rates

The 2-year note gained 12/32 to 100 9/32 with a yield of 2.97 percent, down from 3.18 percent.

The 3-month yield dropped to 2.94 percent from 3.04 percent as the discount rate fell to 2.88 percent from 2.97 percent.

Additional buying in after hours trade sent yields lower. The benchmark 10-year yield fell to 3.97 percent as the 30-year yield fell to 4.47 percent and the 2-year yield dropped to 2.92 percent. The 3-month note yield fell to 2.92 percent and the discount rate fell to 2.85 percent.

Joe Brusuelas, chief U.S. economist at IDEAGlobal.com, said bond market investors also responded well to the fact that the Fed statement emphasized that growth is weak. Bonds perform well in periods of economic softness.

New revelations from savings and loan Washington Mutual Inc. and H&R Block Inc., the nation's largest tax preparer, underscored the fact that the contagion from subprime mortgage problems has not been contained.

These developments bolstered expectations for a rate reduction and helped stir demand for Treasurys. Throughout the subprime crisis, demand for the security of Treasurys has been strong as these bonds carry a government guarantee while other portions of the credit market are riskier.

H&R Block Tuesday reported a bigger-than-expected quarterly loss after shutting down its Option One Mortgage subprime lender. The company will realign its costs structure because it will be a smaller entity without the subprime lending unit.

Washington Mutual, a major mortgage lender, late Monday said it will exit the subprime business and slash about 3,150 jobs from its payrolls. The savings and loan also will close offices, lay off more than 3,000 workers, slash its dividend, and set aside up to $1.6 billion for loan losses in the fourth quarter.