TREASURIES-Bonds rise as stock loss trumps inflation worries
* Bonds move back into positive territory in late trade * Weak U.S. job growth seen raising chances for QE3 * Corporate debt supply adds selling pressure on bonds * New three-year debt seen selling near record low yield By Richard Leong NEW YORK, Sept 10 (Reuters) - U.S. Treasuries prices rose on Monday as a sell-off on Wall Street stocks overshadowed inflation worries about the Federal Reserve possibly buying more bonds and jitters that a wave of corporate bond deals might cut demand for government debt. More investors sold stocks in the last hour of trading and moved some money back into safe-haven U.S. government debt. They booked profits ahead of a Fed policy meeting later this week and after the Standard & Poor's 500 stock index climbed to its highest level in nearly five years last week. "It was very up-and-down day for bonds. Stocks were kind of melting down. People are hunkering down, waiting for what the Fed will do," said Gennadiy Goldberg, an interest rate strategist at TD Securities in New York. Prior to the deepening decline in stocks, Treasuries prices were in the red due to inflation and supply worries. While more stimulus from the central bank is intended to help the U.S. economy, analysts have questioned the effectiveness of a third round of quantitative easing, dubbed QE3, as the prior two rounds of bond purchases have had limited success in lowering unemployment. If the Fed pumps more cheap cash into the economy and continues to keep interest rates near zero, some traders fear it would be tough to keep inflation in check whenever economic growth gains traction. "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. In its prior two rounds of stimulus, the U.S. central bank bought a total of about $2.3 trillion in U.S. Treasuries and mortgage-backed bonds. In the wake of Friday's disappointing payroll report, analysts in a recent Reuters poll see a 60 percent chance the Fed would embark on QE3. Interest rates futures implied traders bet the Fed will prolong its near-zero rate pledge into 2015 from the current late 2014 guidance. Fed policy-makers will meet on Wednesday and Thursday. Other closely watched events this week 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. Growing inflation expectations from possibly more Fed stimulus cast some worries about the $66 billion in coupon-bearing federal debt for sale this week. In the private debt market, 14 high-grade deals were scheduled on Monday for sale this week. Some analysts estimated this week's investment-grade corporate debt offerings could total $30 billion, according to IFR, a unit of Thomson Reuters. "It could be a tough week for supply," said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott in Philadelphia. The U.S. Treasury Department will kick off that supply on Tuesday with a $32 billion auction of three-year notes, followed by $21 billion in 10-year supply on Wednesday and $13 billion in 30-year bonds on Thursday. In the "when-issued" market, traders expect the upcoming three-year note issue due Sept 2015 to yield 0.335 percent , a hair above the 0.334 percent set a year ago, which was the lowest ever at a three-year note auction. In the open market on below-average trading volume, benchmark 10-year Treasuries notes were up 2/32 in price at 99-22/32, yielding 1.659 percent, down 0.9 basis point on the day. They were down as much as 6/32 with a 1.69 percent yield. Thirty-year bonds, which are most vulnerable if inflation accelerates, were 7/32 higher at 98-25/32 for a yield of 2.810 percent, down 1.2 basis points from late Friday. They were down 28/32 earlier.
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