TREASURIES-U.S. debt dips as market awaits fresh QE announcement

LONDON Wed Dec 12, 2012 6:29am EST

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LONDON Dec 12 (Reuters) - U.S. Treasury prices fell on Wednesday as investors made final adjustments to their positions in anticipation of the Federal Reserve unveiling more stimulus measures, a move that could boost equities and hurt bonds.

* The Federal Reserve's policy meeting, which concludes later in the day, is expected to bring a fresh bond buying programme, known as quantitative easing or 'QE', as the central bank tries to boost a fragile U.S. economy.

* Although widely anticipated, the move could still bring about a rally in equities that would put U.S. bonds under pressure, particularly in the 10-year sector where the influence of the Fed's low interest rate policy was less apparent.

* "We're getting curve steepening from selling of (10-year debt) ahead of the Fed. This has to be the most nailed-on Fed QE announcement ever," a trader said. "We're also getting a general risk-on tone in Europe, where Greece looks to have got its debt deal done."

* Ten-year Treasury yields rose 1.6 basis points to 1.67 percent, adding to a 4 basis point rise on Tuesday while two-year yields were flat at 0.24 percent. Treasury futures were 7/64 lower at 133-19/64, in line with a fall in German Bund futures.

* The relatively muted moves reflected broad agreement in the market about the fact that QE would be forthcoming and also on the scale of the programme. Economists polled by Reuters expect the Fed to announce $45 billion per month of bond buying.

* "If the total is within five billion of the 45 billion consensus, there won't be much reaction... anything either side of that would create a bit of a stir," said Monument Securities strategist Marc Ostwald.

* Any selloff after the Fed announcement was also likely to be kept in check by concern that policymakers must complete tough negotiations to avoid the 'fiscal cliff' of recession-inducing tax hikes and spending cuts next year.

* "The fiscal cliff is not going to get sorted this week and the market didn't really get hit by the better jobs numbers on Friday. I would be looking to buy a broader dip and still want to be long this market, there's enough hurdles out there," the trader said.

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