TREASURIES-Yields edge up before $66 bln US debt sales

Mon Jan 7, 2013 11:16am EST

Related Topics

* Investors focus on $66 bln new supply this week
    * Bonds trade in higher yield range after sell-off
    * Fed buys $1.47 bln in bonds due 2036-2042

    By Karen Brettell
    NEW YORK, Jan 7 (Reuters) - U.S. Treasuries yields edged up
on Monday as investors prepared for the first sale of new
coupon-bearing debt this year and speculated on whether the
Federal Reserve is likely to end bond purchases before year-end.
    Yields broke through support levels last week to trade at
eight-month highs after the minutes from December's Fed meeting
led some to speculate that the central bank may end its bond
purchases earlier than many thought.
    Despite the recent yield gains, sales of $66 billion in new
coupon-bearing debt this week may put a lid on any significant
rallies from investors seeking to take advantage of the higher
yields.
    "We have a lot of supply this week so I think the rallies
will be somewhat capped," said Dan Mulholland, managing director
in Treasuries trading at BNY Mellon in New York.
    The Treasury will sell $32 billion in three-year notes on
Tuesday, $21 billion in 10-year notes on Wednesday and $13
billion in 30-year bonds on Thursday.
    Benchmark 10-year notes were last down 2/32 in
price to yield 1.91 percent, up from 1.90 percent on Friday.
They have risen from 1.70 percent at year-end.
    After last week's sell-off, Mulholland sees the notes
trading in a range of around 1.85 percent to 2.10 percent.
    The dramatic increase in yields so far this year is raising
the question of how far the sell-off will extend, with much
debate over whether 2013 will be the year that finally ends the
30-year bond bull run.
    Societe Generale sees bond yields marching higher through
the year, as economic data continues to improve.
    "Things are going to get better from here. I think we're
already seeing momentum," said Mary Beth Fisher, head of rate
strategy at the bank in New York.
    One wild card in the coming weeks is whether Treasuries will
regain a safety bid as the U.S. Treasury again gets close to
hitting the debt ceiling and as lawmakers wrangle over how to
cut spending and reduce the gaping deficit.
    SocGen's Fisher sees yields in general heading higher,
though she notes the market may become more volatile as
negotiations get more heated.
    "The 'Fiscal Cliff: Part 2' negotiations are going to make
the market volatile, but it won't substantially change its
direction," she said.
    The bank recommends entering trades that would benefit from
a steepening yield curve between three-year and 10-year notes to
take advantage of an expected increase in volatility.
    The Federal Reserve will buy debt every day this week as
part of its quantitative easing program, meant to hold down
long-term borrowing rates in a bid to stimulate the economy.
That may help hold down the longest part of the yield curve.
    "That may keep a flattening pressure on the market," said
BNY's Mulholland.
    The Fed on Monday bought $1.47 billion in bonds due from
2036 to 2042.
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