TREASURIES-Treasuries seen choppy as investors digest Fed easing

LONDON Thu Dec 13, 2012 6:55am EST

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LONDON Dec 13 (Reuters) - U.S. Treasuries rose slightly on Thursday but trade was expected to be choppy as investors mulled the long-term impact of the Federal Reserve's latest move, which links rate policy explicitly to economic data.

* U.S. Treasury prices edged higher after falling in the previous session. Five-year bond yields fell 1.3 basis points to 0.64 percent and 10-year borrowing costs fell 1.4 bps to 1.69 percent.

* The U.S. Federal Reserve announced a new round of monetary stimulus on Wednesday and took the unprecedented step of indicating interest rates would remain near zero until unemployment falls to at least 6.5 percent.

* Analysts said market reaction was contained as investors mulled what to make of the announcement. But many predicted tying monetary policy more explicitly to economic data would make markets vulnerable to price swings.

* "The market's reaction is very muted, in the first instance, because they are not really quite sure how this is going to work," Marc Ostwald, strategist, at Monument Securities said. "Markets will look to pre-empt whatever they think the Fed is going to do, so it's actually going to make things a lot more volatile."

* The U.S. central bank previously said it expected to hold rates near zero through at least mid-2015.

* "Things are going to be dictated by the economic data particularly unemployment and inflation. That could point to more volatility in the markets going forward," Nick Stamenkovic, bond strategist, at RIA Capital Markets said.

* Analysts said any U.S. Treasury sell-off was limited by ongoing concerns over whether U.S. lawmakers will agree on a deal to avoid a $600 billion mix of spending reductions and expiring tax cuts set to take hold at the start of 2013.

* Such worries were underscored by Fed Chairman Ben Bernanke, who warned that running over this "fiscal cliff" would lead to a new recession. He told reporters the Fed could ramp up its bond buying "a bit," but emphasized that monetary policy has limits and could not fully offset the impact.

* Thirty-year yields were little changed at 2.89 percent, with traders saying they underperformed slightly before a sale of long-dated maturities. Thirty-year debt fell particularly sharply in the secondary market on Wednesday after the Fed announced a bond-buying program that shifts more of its purchases to the five-year sector.

* "We have got a thirty-year auction today as well. The market is going to try to cheapen that up, and steepen the curve 10's-30's as much as it can to take down the supply. So that's why you are seeing the long-end of the curve underperforming today," the trader said.

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