Steady after rebound; watching Fed, data
LONDON (Reuters) - U.S. Treasuries were little changed in Europe on Tuesday after rebounding overnight from Monday's sharp sell-off, with liquidity described as thin ahead of U.S. economic data and a Federal Reserve meeting later.
Fed officials are expected to assess its latest $600 billion bond-buying program but not signal any shift in buying intentions, even though a planned extension of tax cuts could provide a boost to the economy.
Retail sales and wholesale prices data are also awaited to help gauge the outlook for U.S. inflation and growth.
Traders and analysts expected the Fed to maintain its stance of loose monetary for an "extended period" and its commitment to purchasing $600 billion Treasuries by the end of Q2 2011.
"The latest fiscal stimulus is expected to provide a spur to U.S. growth in early 2011 via higher consumer spending, resulting in modestly lower unemployment," wrote Nick Stamenkovic, macro analyst at RIA Capital Markets, in a note.
"This significantly reduces the odds that the Fed will extend asset purchases beyond the middle of 2011 though a rate hike is unlikely before the fourth quarter of next year."
Buying by the U.S. central bank had helped stabilize prices on Monday and one trader in London said a dovish tone to the Fed statement following Tuesday's meeting "will help keep a bid in the market" during the final trading days of 2010.
The benchmark 10-year bond yield hit a six-month high of 3.395 percent in turbulent trading on Monday as investors dumped U.S. debt in anticipation of higher growth and deeper deficits in the United States.
That was above a key technical level of 3.375 percent, a 62 percent retracement of the bond's move between May and December.
It was yielding 3.285 percent at around 1141 GMT, little changed from Monday's close, as was the more interest rate-sensitive two-year bond at 0.5843 percent and five-year bond at 1.891 percent.
Stamenkovic said key support for the 10-year paper is at 3.50 percent, with resistance at 3.10 percent.
"Liquidity is very thin, and with the Fed today the market is really trading sideways," said the trader, noting that 2010's last full week of activity "really offers your last chance to unwind positions or clean up your book".
U.S. retail sales are forecast to have grown 0.6 percent in November, down from growth of 1.2 percent in October, according to a Reuters poll of analysts.
The market will be watching for signs of growth but with low inflation -- a combination that could see investors cut more positions in low-risk Treasuries.
Producer prices, excluding food and energy costs, are forecast to have risen by 0.2 percent after a 0.6 percent fall in October.
"Our belief is that the underlying macro situation remains sufficiently fragile that the (Fed is) likely to come across as sounding somewhat dovish compared to recent market moves," wrote Lloyds analysts, noting the 10-year yield has risen more than 100 basis points since the second round of QE began last month.
They said any further significant back up in yields would present a threat to the recovery scenario, given weak housing data and tight credit conditions for small businesses.
"This is not to say we are calling base to the sell off in the U.S. debt market just yet; more that we are getting toward levels that present value and scaling-in is worth considering between current levels and 3.50 percent in 10-year yields."
March futures on the 10-year note rose 4/32 to 120-16/32, above a six-month low set on Monday.
(Reporting by Catherine Evans, editing by Ron Askew)
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