TREASURIES-U.S. bond prices edge higher as selling sputters

Thu Mar 15, 2012 12:17pm EDT

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* 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."
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