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

Mon Jan 7, 2013 3:31pm 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 Ellen Freilich
    NEW YORK, Jan 7 (Reuters) - U.S. Treasuries yields edged up
on Monday to just below their highest levels in eight months as
investors got ready for the new year's first sale of new coupon
securities and debated whether the Federal Reserve could end
bond purchases before year-end.
    Yields moved to eight-month highs last week after minutes
from the Fed's December policy meeting caused investors to
wonder whether the central bank might end its bond purchases -
an unconventional monetary easing strategy - earlier than many
had thought.
    Though the highest yields in eight months could attract
buyers, traders said $66 billion in new coupon-bearing debt
supply this week could restrain any significant rallies.
    The Treasury is scheduled to 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 1/32 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, Dan Mulholland, managing
director in Treasuries trading at BNY Mellon in New York, sees
the notes trading in a range of around 1.85 percent to 2.10
    The dramatic increase in yields so far this year has raised
the question of how far the sell-off will go, with debate -
again - over whether 2013 will be the year that finally ends the
30-year bond bull run.
    Daniel Heckman, senior fixed income strategist at U.S. Bank
Wealth Management in Minneapolis, said while the market was
wondering about the future of Fed debt purchases, it would also
start to realize the comments on that subject in the minutes of
a Fed policy meeting were "more in the context of a debate
rather than a policy change.
    "I'm not saying we'll go to new lows in yields, but we'll
get a better tone to the bond market as some of these issues get
debated further," he said.
    An expected political struggle over raising the U.S. debt
ceiling could also revive investors' appetite for U.S. debt,
viewed as a refuge from financial turbulence.
    "The debt ceiling is really going to be a huge battleground
for politicians and could cause some temporary pause in the
markets where bonds may rally," Heckman said.
    Even though interest rates have risen sharply since the
start of the new year, the retreat in U.S. debt prices may not
go much farther he said.
    "The Fed is probably not going to end QE in mid-2013,"
Heckman said, referring to the quantitative monetary easing the
Fed has been doing to try to keep the economy from sliding into
a recession, or worse.
    The Fed wants stronger employment growth before it tapers
off, or ends its purchases, he said.
    "Another major factor will be consumer behavior; no one has
seen the first paycheck of 2013 with the impact of the payroll
tax increase," Heckman said. "Once that hits home, it will be
interesting to see how consumers react."    
    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.
    SocGen 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 Fed 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
Mulholland. "We have a lot of supply this week so I think the
rallies will be somewhat capped."
    The Fed on Monday bought $1.47 billion in bonds due from
2036 to 2042.