TREASURIES-Prices slip as Fed announces new buying program

Wed Dec 12, 2012 2:13pm EST

Related Topics

* Fed announces $45 bln/month of Treasury buying
    * Fed adopts numerical thresholds for policy
    * 30-year bonds underperform, yields at month-high

    By Karen Brettell and Luciana Lopez
    NEW YORK, Dec 12 (Reuters) - Treasuries prices fell on
Wednesday and 30-year bonds slumped after the Fed said it would
shift more purchases to the five-year sector in a new easing
program, with expectations the move would boost the economy and
thus help riskier assets such as stocks.
    The Federal Reserve committed to monthly purchases of $45
billion in Treasuries on top of the $40 billion per month in
mortgage-backed bonds it started buying in September. It will
expand purchases to five-year notes from the current seven-, 10-
and 30-year Treasuries. 
    It also took the unprecedented step of saying it would keep
interest rates near zero until the jobless rate falls to 6.5
percent, well below its current level, so long as inflation and
inflation expectations were contained. 
    "They are basically taking out the same amount of duration
that they were in Twist, but they are buying less in the long
end than they had been before," said Ira Jersey, an interest
rate strategist at Credit Suisse in New York. 
    Five-year notes fell 1/32 in price to yield 0.643
percent, from around 0.636 percent late on Tuesday. Benchmark
10-year notes dropped 8/32 to yield 1.685 percent. 
    Thirty-year bonds dropped 30/32 in price to
yield 2.89 percent, up from 2.84 percent late on Tuesday.
    The yield gap between 5-year notes and 30-year bonds also
expanded to 225 basis points from 221 late on Tuesday to the
widest since October. 
    Under Twist, the Fed has been selling shorter-dated
Treasuries and using the proceeds to buy longer-dated debt. The
program is set to expire at the end of December, and analysts
say the Fed has little to no shorter-dated debt to sell. 
    The yield curve also expanded as investors bet that new
purchases would boost economic growth, which would reduce demand
for safe-haven bonds and increase investment in riskier assets
including stocks. 
    Treasuries had edged slightly higher earlier on Wednesday
following strong demand for an auction of $21 billion of 10-year
notes. The notes sold at a high yield of 1.65 percent, around 2
basis points lower than where the notes were trading before the
sale.  
    The Treasury on Thursday will sell $13 billion of 30-year
bonds and next week it will auction two-, five-and seven-year
notes along with five-year Treasury inflation-protected
securities. The Treasury on Tuesday sold $32 billion of
three-year notes.
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