TREASURIES-Bonds firm on Fed purchases, data, debt limit concern

Wed Jan 16, 2013 12:55pm EST

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By Ellen Freilich

NEW YORK, Jan 16 (Reuters) - U.S. Treasury debt prices edged up on Wednesday on Federal Reserve purchases, subdued inflation and concerns about a looming fight in Washington over the federal debt ceiling.

Early stock market losses were also supportive initially, but as major stock indexes reduced losses, Treasuries shaved some gains.

"A lot of crosscurrents are supporting Treasuries right now, including the almost daily buybacks that the Fed is doing," said Wilmer Stith, portfolio manager of the Wilmington Broad Market Fund in Baltimore.

The Fed bought $1.474 billion in Treasury coupons maturing from February 2036 through November 2042 as part of its ongoing effort to foster enough economic activity to allow the unemployment rate to fall. Fed Chairman Ben Bernanke indicated late Monday that the Fed would continue those asset purchases.

Consumer price data reported on Wednesday offered evidence that inflation was subdued enough for the Fed to adhere to its path of monetary ease.

While there are positive parts to the U.S. economic story that could allow yields to rise later in the year, issues like the debt ceiling and payroll tax cut that was not carried forward are underpinning Treasuries.

Developments in Japan are also supportive, Stith said.

Former deputy Bank of Japan governor Kazumasa Iwata, viewed by markets as a strong candidate for the next BOJ governor, said quantitative easing is effective in beating deflation if implemented through appropriate means and at a sufficient size,

Iwata's advocacy of bolder monetary easing has made him a favorite among politicians as a possible successor to incumbent Governor Masaaki Shirakawa when his term expires in April.

"Japan is considering some of the same measures as the Fed and that can affect our market," Stith said. "If they buy dollars, they will put them in risk free assets which will help the shorter end of the Treasury curve.

"Given the propensity for Treasury bill yields to go negative, they could be forced to go farther out on the maturity curve than they have historically and this could help shorter-dated coupons like two- and five-year notes," Stith said.

Data showed consumer prices were flat in December and prices excluding food and energy items rose just 0.1 percent.

"This supports the Fed's contention that inflation is mild and that inflation expectations should be stable," said Terry Sheehan, an economic analyst at Stone & McCarthy Research Associates in Princeton, New Jersey.

Benchmark 10-year notes rose 5/32 in price at 98-6/32, their yields easing to 1.83 percent from 1.84 percent late on Tuesday.

Thirty-year bonds climbed 5/32 to 94-23/32, their yields easing to 3.02 percent from 3.03 percent on Tuesday.

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