The yield gap between 10- and 30-year Treasuries widened to themost in a year on concern the Federal Reserve's plan to buy moredebt and pledge to keep monetary policy accommodative even when theeconomy strengthens will spur inflation.

The difference touched 1.21 percentage points, the most sinceAugust 2011, as yields on 30-year debt, more sensitive to inflationbecause of its longer maturity, climbed to the highest since May.The drop in prices followed a $13 billion sale of bonds just beforethe Federal Open Market Committee said it would expand its holdingsof long-term securities with mortgage- debt purchases. It also saidit would probably keep interest rates at virtually zero into2015.

“They are erring on the side of trying to promote additionalgrowth,” said Jeff Phlegar, chairman and chief executive officer inNew York at MacKay Shields LLC, an advisory firm that oversees $70billion in fixed-income assets. “They are not concerned aboutinflation.”

Thirty-year bond yields rose three basis points, or 0.03percentage point, to 2.95 percent at 3:50 p.m. New York time andreached 3 percent, the highest level since May 14.

Yields on 10-year notes fell two basis points to 1.74 percentafter rising to 1.83 percent, the highest since Aug. 21. They fellto a record 1.379 percent on July 25 and climbed to a three-monthhigh of 1.86 percent on Aug. 21.

Other assets rallied after the Fed's statement, with theStandard & Poor's 500 Index climbing 1.7 percent and goldfutures gaining as much as 2.4 percent to $1,775 an ounce.

The difference in yield between 10-year notes andsimilar-maturity Treasury Inflation Protected Securities, a gaugeof traders' outlook for consumer prices known as the break-evenrate, reached 2.49 percentage points, the most since July 2011. Ithas averaged 2.2 percent this year.

FOMC officials upgraded their estimate for 2013 gross domesticproduct growth to 2.5 percent to 3 percent, compared with 2.2percent to 2.8 percent in June. Estimates for 2014 are from 3percent to 3.8 percent, versus 3 percent to 3.5 percent in theprevious forecast.

Almost two-thirds of economists in a Bloomberg survey hadforecast the central bank would announce more government debtpurchases under quantitative easing. The Fed bought $2.3 trillionof Treasuries and mortgage-related debt in two rounds of thestimulus strategy from 2008 to 2011.

'Will Continue'

“If the outlook for the labor market does not improvesubstantially, the committee will continue its purchases of agencymortgage-backed securities, undertake additional asset purchasesand employ its other policy tools as appropriate,” the FOMC saidtoday in a statement at the end of a two-day meeting inWashington.

The Fed will make open-ended purchases of $40 billion ofmortgage debt a month as it seeks to boost economic growth andreduce employment, the committee said.

“A highly accommodative stance of monetary policy will remainappropriate for a considerable time after the economic recoverystrengthens,” the FOMC said.

Yields on Fannie Mae-guaranteed mortgage bonds trading closestto face value declined 18 basis points to 2.18 percent as of 3:05p.m. in New York, according to data compiled by Bloomberg. The gapwith an average of five- and 10-year Treasury rates narrowed 16basis points to about 98 basis points, the lowest since 1992.

The Fed's approach may have been “on the light side” ofexpectations, said John Fath, a money manager at the investmentfirm BTG Pactual in New York who helps manage $2.5 billion inbonds. “If you look at when they did QE1 and QE2, inflation was ata lower level. Maybe it was more difficult with the hawks toovercome their opinions.”

Investors should buy seven-year Treasuries because the monthlypurchases outlined by the Fed reflect a “fairly measured, althoughopen-ended” approach that may last longer than earlier efforts,favoring intermediate maturities, Brett Rose, an interest-ratestrategist in New York at Citigroup Inc., wrote in a note toclients. The firm is one of the 21 primary dealers that trade withthe Fed.

Treasury 30-year bond yields reached their lowest level of theday, 2.86 percent, after the U.S. sold $13 billion of thesecurities before the Fed statement. The sale yielded 2.896percent, compared with a forecast of 2.929 percent in a BloombergNews survey of six primary dealers. The bid-to-cover ratio, whichgauges demand by comparing total bids with the amount of securitiesoffered, was 2.68, versus an average of 2.62 at the past 10sales.

'Grave Concern'

The central bank's stimulus efforts since 2008 have failed tobreathe life into the labor market, which Chairman Ben S. Bernankesaid last month is a “grave concern.” Unemployment has been stuckabove 8 percent for 43 straight months.

Bernanke said Aug. 31 in a speech in Jackson Hole, Wyoming, thata Fed study found the large-scale asset purchases may have raisedthe level of economic output by almost 3 percent and boostedprivate payroll employment by more than 2 million jobs.

U.S. gross domestic product was 1.7 percent in the secondquarter, after reaching 4.1 percent from October through December,the highest since 2006, Commerce Department data show. The joblessrate was 8.1 percent in August, the Labor Department said on Sept.7.

The number of Americans filing applications for unemploymentbenefits rose last week more than projected, data showed today.Initial jobless claims increased to 382,000, from 367,000 theprevious week, the Labor Department reported.

“In the spirit of Halloween, it was more like a trick or treat,”Richard Schlanger, who helps invest $20 billion in fixed-incomesecurities as vice president at Pioneer Investments in Boston, saidof the Fed decision. “They provided some candy in the sense theywill be buyers of mortgage-backeds, they provided the extendedlanguage that everybody was looking for, but they didn't give awayall the candy in the basket.”

The Fed also said today it will continue its Operation Twistprogram to replace shorter-term debt in its portfolio withlonger-term securities to extend its holdings' average maturity andput downward pressure on long-term borrowing costs.

Bloomberg News