TREASURIES-Most bonds up a bit; long end underperforms before supply

Thu Nov 8, 2012 10:20am EST

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By Ellen Freilich
    NEW YORK, Nov 8 (Reuters) - Most U.S. Treasuries traded
slightly higher on Thursday though  bonds at the long end of the
yield curve were weaker before a sale of 30-year securities
later in the day.
    As traders positioned for the U.S. Treasury's final
refunding auction of the week, a $16 billion sale of 30-year
bonds, the 30-year Treasury price was down 2/32 of a
point, leaving the yield at 2.85 percent.
    The 30-year auction involves "ample uncertainties"
especially in the months in which there are quarterly
refundings, because the size of the auction is $3 billion larger
than in monthly re-openings, said Cantor Fitzgerald analyst
Justin Lederer in New York.
    "Overall we expect decent demand for the long end as
investors need duration and yield and look for rates to stay low
with (President Barack) Obama winning a second term," he said.
    A big supporting role for the 30-year Treasury auction is
played by the Federal Reserve which is currently buying about 92
percent of new issuance in the long end in its "Operation Twist"
monetary stimulus program, Lederer said.
    That program is due to end next month, but many market
participants believe the Fed will announce more Treasury
purchases at the December meeting of the Federal Open Market
Committee, the Fed's monetary policy-making arm.
    "The 30-year, like every other sector of the curve, has been
stuck in an extremely tight range since mid-September," Lederer
noted, its yield moving between 2.77 percent and 3.02 percent.
    "We do not expect this range to break significantly in the
near term," he said.
    With the long end of the curve undeperforming, prices of
Treasury instruments in the "belly", or middle, of the yield
curve were narrowly higher, enjoying a mild safe-haven bid based
on uncertainty about the euro zone and U.S. fiscal concerns.
    Obama's decisive election victory supported bonds amid
expectations for modest economic growth and accommodative,
bond-friendly monetary policy, but financial markets are
wondering whether the White House and Congress will be able to
avoid or minimize the potential damage of a $600 billion package
of automatic tax increases and spending cuts, due to take effect
at the end of this year.
    "A Democratic president and Republican House will need to
come together to deal with the nation's fiscal health," said
Zach Pandl, strategist at Columbia Management in Minneapolis.
"Having the election over is a relief, but investors still need
to see a favorable resolution of the fiscal cliff before taking
a more optimistic view on the U.S. economy," he said.
    The uncertainty over the "fiscal cliff" issue continued to
lend a little safe-haven support to U.S. Treasuries.
    So did concern about the European debt crisis. Greek
lawmakers - by a very thin margin - approved an austerity
package constructed to get international aid. 
The coalition government still needs to pass the 2013 budget in
a vote expected on Sunday.
    Spain showed investors will buy its long-term debt on
Thursday with a successful bond auction that completed its 2012
issuance program. 
    The European Central Bank kept rates on hold and its
president, Mario Draghi, sounded downbeat on the euro zone
economy and said he was ready to start new purchases of bonds.
    News the U.S. trade deficit narrowed in September due to a
rise in U.S. exports had little influence on bonds. The impact
of a drop in new jobless claims to 355,000 was also slight.
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