TREASURIES-U.S. bond prices edge higher as selling sputters
* Treasury yields at five-month highs * Higher yields, lower prices draw buyers By Ellen Freilich NEW YORK, March 15 (Reuters) - A sharp sell-off in Treasury debt driven by a more upbeat economic outlook stalled on Thursday as prices edged higher and yields at five-month highs drew some buyers. Some argued the selling had been overdone and that the outlook still held plenty of uncertainty despite some promising economic data. Others said higher yields were here to stay because investors believed a 2 percent yield on the benchmark 10-year note was too low given U.S. job growth, the recent deal on Greece and some reassuring stress test results for a majority of U.S. banks. A fall in new U.S. claims for unemployment benefits to a four-year low last week, suggesting a strengthened labor market, and supported investors' recent preference for riskier assets at the expense of safe-haven U.S. debt. But the sharp run-up in yields over the last two trading sessions drew buyers. That allowed the 10-year Treasury note to erase an early loss and rise 3/32 in price, leaving its yield at 2.27 percent. Sharon Stark, managing director and fixed-income strategist at Sterne Agee in Birmingham, Alabama, said markets had read too much optimism into the Federal Reserve's statement on Tuesday. If the economy can maintain a 3 percent growth pace, another round of monetary easing will not be necessary, she said. But if the economy was expanding at a 2 percent to 2.5 percent pace and something caused it to pull back another percentage point, "the Fed won't stand for that," she added. Counterveiling forces are affecting the Treasury market, according to Wilmer Stith, manager of the Wilmington Trust Broad Market Fund in Baltimore, part of MMT Bank's Wilmington Trust Investment Advisors, the latter with $25 billion in assets under management. "More signs of sustainable growth have led to higher yields, but we also have the counterforce of the Fed's Operation Twist," Stith said, referring to the Federal Reserve's purchases of longer-dated Treasuries using proceeds from the sale of shorter-dated maturities. On Thursday, the Fed bought $4.027 billion in Treasuries with maturity dates ranging from May 31, 2018 to Nov. 15, 2019. "The Fed is buying the long end of the yield curve and that will dampen the upward movement in longer-term yields until the end of June when Operation Twist ends," he said. What could keep yields from slipping from these higher levels is investors deciding their durations are too extended and that their portfolios - given the dominance of government issuance since the financial crisis - are too heavily weighted toward Treasuries. "You have the beginning of a perfect storm of risk brewing," he said. "Investors started to see that they were vulnerable and that's why we saw such a dramatic upward shift in yields." Stith's fund is walking that talk. The Wilmington Trust Broad Market Fund has a lower average duration than the aggregate index, he said. Meanwhile, the fund is overweight five-year notes and underweight on 30-year bonds. "We're underweight Treasuries, overweight corporates and we have high-yield," he said. "The sector we continue to love are investment-grade corporates."