TREASURIES-Long-dated prices fall as QE3 hopes spur inflation fears
By Karen Brettell NEW YORK, Sept 10 (Reuters) - Long-dated U.S. Treasuries prices fell on Monday, and thirty-year bonds underperformed, as investors bet that a third bond purchase program in the United States would stoke higher inflation expectations. The Federal Reserve is seen as likely to launch a new quantitative easing program when it meets later this week, as the central bank struggles with a sluggish U.S. economy with a stubbornly high jobless rate. Treasuries initially rallied strongly on Friday as a weaker- than-expected payrolls report boosted bets of further stimulus. They have since given back ground as investors focus on potential price pressures from any new program. "Of the possible consequences of what the Fed could do, the market is focusing only on the most negative one. The prospect of increasing inflation expectations," said Jim Vogel, interest rate strategist at FTN Financial in Memphis, Tennessee. Intermediate-dated Treasuries have been among the best performers on expectations that the Fed would extend purchases to mortgage-backed securities with maturities of around five years. Five-year Treasuries yields rose back to 0.65 percent, after falling as low as 0.60 percent on Friday. Breakeven levels on five-year Treasury Inflation-Protected Securities, which measure expected inflation, increased to 2.02 percent on Monday, the highest since early May, and up from 1.98 percent on Thursday. Benchmark 10-year Treasuries yields rose to 1.68 percent on Friday, up from a low of 1.59 percent on Friday. Thirty-year bonds yields, which are bearing the brunt of inflation fears, increased to 2.85 percent, up from a low of 2.71 percent on Friday. The yield gap between 10-year notes and 30-year bonds also expanded to 118 basis points on Monday, out from 112 basis points on Thursday and the widest level since mid-May. The spread between five-year notes and 30-year bond yields widened to 221 basis points, from 212 basis points on Thursday and also the widest level since mid-May. New Treasury supply of $66 billion scheduled for this week is also weighing on debt prices. Some investors are concerned with the timing of the sale of $13 billion in new 30-year bonds, which will be auctioned on Thursday just before the Fed gives the statement from its two-day meeting. This week's sales will also include $32 billion in three-year notes on Tuesday and $21 billion in 10-year notes on Wednesday. Expectations of further Fed action have increased since Chairman Ben Bernanke said in a speech at Jackson Hole, Wyoming last Friday that high unemployment is a "grave concern," and that the central bank would act as needed to strengthen the economic recovery. The Federal Reserve will purchase up to $1.5 billion in longer-dated Treasury Inflation-Protected Securities due between 2019 and 2042 on Monday as part of its Operation Twist program, designed to lower long-term borrowing rates. Other closely watched events will include a ruling by Germany's Constitutional Court on Wednesday on whether the euro zone's permanent bailout fund is compatible with German law, a vital condition for it to come into force. The Netherlands will hold elections the same day.
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