Prices rise on lack of supply, Fed buying

NEW YORK Wed Mar 21, 2012 3:51pm EDT

NEW YORK (Reuters) - Treasury prices rallied on Wednesday as heavy buying by the Federal Reserve and a lack of new Treasury supply contributed to demand for the newly cheapened U.S. debt.

Prices also got a boost from weaker-than-expected housing data, while investors took advantage of a recent rise in yields to do some bargain hunting.

In a sign of strength for the rally, the 30-year Treasury yield briefly broke back below a technically significant level of 3.3851 percent, its 200-day moving average. It hit 3.3725 percent before returning to a level above the marker.

"Clearly we've had a large move to higher yields over the last week or so - this is more the rubber band effect," said Adam Brown, co-head of rates trading at Barclays Capital in New York.

Treasuries prices plunged last week and yields solidly broke above ranges that had held for four and a half months, after data suggested the U.S. economic recovery was gaining steam. That lowered expectations of further stimulus from the Federal Reserve.

The recent price decline, which last week added over 25 basis points to benchmark yields, offered some investors a chance to buy lower-risk U.S. government debt at prices they have not seen in months.

"Just like everything, we overdo it. We overdo it sometimes on the upside and this time we overdid it on the downside," said Mary Ann Hurley, vice president of fixed-income trading at D.A. Davidson & Co in Seattle.

"I'm not surprised to see some buying emerging, especially because the economic statistics, at least in the housing sector, seem to be coming in on the softer side," Hurley said.

The National Association of Realtors said existing home sales slipped 0.9 percent to an annual rate of 4.59 million units in February. Economists polled by Reuters had expected sales to rise to a 4.62-million-unit sales pace last month. But January's sales pace was revised up to 4.63 million units from the previously reported 4.57 million units.

U.S. benchmark 10-year Treasury notes were trading 16/32 higher in price to yield 2.30 percent, down from 2.36 percent late Tuesday. Thirty-year bonds were 1-5/32 higher to yield 3.38 percent, down from 3.45 percent a day earlier.

The Federal Reserve's buying of longer-dated Treasuries under its latest stimulus program, nicknamed "Operation Twist," was a significant factor propping up debt prices.

The Fed on Wednesday bought $4.025 billion of Treasuries maturing April 2018 through February 2020 as part of Operation Twist.

Despite Wednesday's dip in yields, some investors were looking for Treasures to eventually resume price declines.

Driving this outlook are comments like those from Minneapolis Federal Reserve Bank President Narayana Kocherlakota who on Tuesday said the Fed may need to start moving away from its near-zero interest rate policy as soon as this year.

"People are starting to price out the end of Fed support," said William Larkin, fixed-income portfolio manager at Cabot Money Management in Salem, Massachusetts. "Over time, it is likely that as the economy recovers and we get stronger and stronger economic data, that yields will continue to rise."

(Additional reporting by Chris Reese, Editing by James Dalgleish)

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