TREASURIES-U.S. bonds climb: Fed buybacks, Bernanke eyed

Mon Jan 14, 2013 9:52am EST

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By Ellen Freilich
    NEW YORK, Jan 14 (Reuters) - U.S. Treasury prices rose on
Monday in anticipation of Federal Reserve bond repurchases of
longer-dated paper this week.
    In December, the Fed announced $45 billion in monthly,
open-ended purchases of government securities with maturities
ranging from four to 30 years in order to maintain downward
pressure on longer-term interest rates, support mortgage
markets, and help make broader financial conditions more
accommodative.
    Markets also have their eye on a speech later in the day by
Fed Chairman Ben Bernanke. Investors will focus on anything that
will give them a clearer sense of how long the Fed will continue
to buy bonds in their continuing efforts to foster economic
growth and lower unemployment.
    Benchmark U.S. 10-year Treasury notes rose 7/32 in price,
their yields easing to 1.85 percent from 1.87 percent on Friday.
      Benchmark yields climbed to 8-month highs in the first
week of 2013 after minutes to the Fed's December meeting cast
doubt on the future of the Fed's asset purchases.
    But the absence of new supply until late January should be
supportive for Treasury prices, analysts said.
    The Fed minutes showed several policymakers "wanted to scale
back quantitative easing (QE) well before year-end, but there is
no coupon supply until the Treasury sells two-year notes next on
January 28," said Chris Rupkey, managing director and chief
financial economist at Bank of Tokyo/Mitsubishi in New York.
    Yields are down from a high of 1.98 percent in early
January, but are up from about 1.70 percent at the end of 2012
as investors price in slightly upbeat economic data and the
prospect of another round of tough political negotiations in
coming weeks to raise the U.S. debt ceiling and let the 
government pay for expenditures Congress has already enacted.
    The Fed's next monetary policy meeting is January 29-30.
    "(Interest-rate) policy seems to be on autopilot until the
unemployment rate gets to 6.5 percent," Rupkey said. "Once 6.5
percent is reached there will be a discussion and our guess is
rates might stay at zero as long as PCE (personal consumption
expenditures)inflation is not above 2.5 percent."
    Fed official Charles Evans on Monday said the U.S. economy
is expected to grow by 2.5 percent in 2013, improving to 3.5
percent growth in 2014. Speaking at the Asian Financial Forum in
Hong Kong, Evans forecast the U.S. unemployment rate would be
7.4 percent this year, and about 7 percent in 2014.
 
    While looming talks on the debt ceiling were likely to keep
yields from climbing back near 2 percent in coming weeks, some
analysts still see them spiking to that level by mid-year once
some sort of deal is reached, given the guarded optimism about
the economic recovery.
    "We are expecting yields to climb up in the Treasury curve
over the year. The performance so far this year is what we
anticipated for the first four to five months of the year and so
the market should take some kind of a break for now," said Pablo
Zaragoza, chief rates strategist BBVA in Madrid. 
    "For mid-year we're expecting 10-year yields at around 1.95
percent. Some volatility could take place but we think 2 percent
could be a reference point for mid-year."
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