TREASURIES-Prices fall on potential Fed stimulus pullback

Tue Jun 25, 2013 12:20pm EDT

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* New single-family home sales jump to near 5-year high in
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    * Durable goods orders for May better than expected
    * Fed speakers look to soothe jittery markets
    * Personal consumption expenditures data on Thursday to be
scrutinized

    By Luciana Lopez
    NEW YORK, June 25 (Reuters) - U.S. Treasuries prices dropped
on Tuesday as robust economic data led investors to extend a
slump that has taken debt yields to near two-year highs on a
possible Fed slowdown in its massive bond-buying program.
    Investors have shed assets around the world - including
stocks and government debt - since Federal Reserve Chairman Ben
Bernanke last week said the U.S. central bank could pull back
from its $85 billion in monthly purchases of Treasuries and
mortgage-backed securities as the economy gains momentum.
    The data released on Tuesday underscored that improvement.
Orders for long-lasting U.S. manufactured goods increased more
than expected in May, and a gauge of planned business spending
rose for a third straight month. 
    In addition, existing single-family home prices recorded
their biggest gain in seven years in April, and U.S. consumer
confidence jumped in June to its highest level in over five
years.
    Those figures could confirm expectations for a slowdown in
the Fed's bond buying, said Michael Hanson, senior economist at
Bank of America Merrill Lynch in New York.
    "We are not expecting the Fed to announce tapering until
December, even though others are calling for earlier," Hanson
said. "The Fed is eager to scale back a little, while the market
has priced in a rapid exit."
    Fed speakers late on Monday took pains to reassure the
markets that central bank policymakers were not looking to exit
all their easing measures anytime soon.
    Minneapolis Federal Reserve President Narayana Kocherlakota
said investors were wrong to view the Fed as having become more
keen to tighten policy than it was before last week's policy
meeting. 
    Richard Fisher, the hawkish head of the Dallas Fed, added
that the U.S. central bank's ultimate "exit strategy" is still a
ways out in the future. 
    "Going forward, I think they're going to be more careful how
they phrase things or release their statements," Dimitri Delis,
interest-rate strategist at BMO Capital Markets in Chicago.
    "The only big unknown here in my mind is if the economy
truly improves, you truly get the traction that you need here,
and the Fed can really get out of" quantitative easing, he said.
    But he also cautioned that with inflation readings low and
the housing and equities markets potentially fragile in the face
of a Fed exit, policymakers could be cautious about stepping on
the brakes.
    
 
    
    U.S. benchmark 10-year Treasury notes fell 14/32
in price to yield 2.595 percent, up from 2.544 percent late on
Monday, when the yield hit its highest in 22 months.
    The 30-year bond fell 20/32 in price to yield
3.594 percent compared with 3.557 percent late on Monday.
    As part of its ongoing effort to boost the economy and
employment, the Fed on Tuesday bought $1.459 billion of
Treasuries, with maturities ranging from February 2036 to
November 2042.
    The afternoon session will see a test of market appetite for
Treasuries at their current levels, when the Treasury will sell
$35 billion in two-year notes.
    "The latest FOMC-induced selloff offers attractive yields
and the front end of the curve remains an ideal place to fade
the supposedly economic-recovery-led selloff," Nomura
strategists wrote in a note to clients.
    The Treasury will also sell $35 billion in five-year notes
on Wednesday and $29 billion in seven-year notes on Thursday.
    Other data later in the week will also prove key for
investors looking to gauge the Fed's exit options.
    Personal consumption expenditures data on Thursday will be
closely scrutinized for signs of whether inflation is
stabilizing at lower levels, rising or if price pressures are
extending their fall.
    The index fell to a record low of 1.05 percent over the year
in April and a continued fall may make it less likely that the
Fed is able to pare back its stimulus program.
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