TREASURIES-Bonds mark narrow losses as traders take profits

Fri Jul 12, 2013 5:07pm EDT

Related Topics

* 10-year yield set for biggest weekly drop in 13 months
    * Worries about Portugal, Chinese growth fed early bid
    * Perception monetary policy will stay easy supports bonds


    By Ellen Freilich and Richard Leong
    NEW YORK, July 12 (Reuters) - U.S. Treasuries prices slipped
on Friday on profit-taking and pre-weekend position-squaring,
following a rebound in the bond market spurred by Federal
Reserve Chairman Ben Bernanke's assurance earlier in the week
that a highly accommodative monetary policy was needed for the
foreseeable future.
    Traders who were still stuck with soured bets in the recent
bond market rout also excused themselves from those positions
before the weekend, analysts said.
    A 20-basis-point drop in the yield on the 10-year Treasury
note over the past week "came when a lot of people were too much
on one side of the boat," said Jonathan Garber, macroanalyst at
Briefing.com in Chicago. "There was a lot of short interest
going into this week. People who came late to that trade got
shaken out of their positions."
    Comments by the president of the Philadelphia Federal
Reserve, Charles Plosser, also encouraged some selling. Plosser,
 in an interview on Bloomberg television on Friday, said he
would like the U.S. central bank to end its $85 billion monthly
bond purchase program this year.
    "I don't want to do it all at once, but I think we should
begin to taper very soon and hopefully end it by the end of this
year," Plosser said.
    Before selling became the dominant trend, Treasuries prices
rose as political and financial troubles in Portugal and a
warning about weakening Chinese growth heightened investors'
appetite for safe-haven U.S. debt.
    That rise in prices sent benchmark yields to their lowest
level in a week, about 20 basis points below a near two-year
peak set on Monday.
    In addition, solid demand for this week's $66 billion in
coupon-bearing supply helped instill confidence in the bond
market in advance of Bernanke's congressional testimony on the
economy next week. 
    But the selling didn't go very far.
    "We've reversed all the reaction to the original QE3
announcement as well as the decline in yields that occurred
after the debt ceiling debate and the S&P downgrade of the U.S.
triple-A rating," Garber said, referring to events that rocked
the bond market in 2011.
    "The market has priced in any tapering in bond purchases the
Fed could do and if that tapering does not materialize, yields
will go lower," he said. 
    Garber cited 2.45 percent on the 10-year yield as a key 
technical support level. "If that were to give way, a move down
to the 2.25 percent area is likely," he said.
    Benchmark 10-year Treasury notes were unchanged
in late trade, yielding 2.59 percent. Earlier, they were up as
much as 15/32, with a yield of 2.518 percent.
    For the week, the 10-year yield was on track to fall 16
basis points, which would be its steepest weekly decline since
June 2012, according to Reuters data.
    Friday's initial price gains in Treasuries were largely a
continued reaction to Bernanke's remarks on Wednesday that a
"highly accommodative policy is needed for the foreseeable
future." 
    The bond market bounce was also fueled by safe-haven bids
due to overseas developments, analysts said.
    Portugal's creditors were set to start reviewing the
country's bailout on Monday, but Portugal asked for a delay
until August after President Anibal Cavaco Silva rejected a plan
to heal a government rift, throwing the euro zone into political
disarray.
    Traders dumped Portuguese government debt, with five-year
yield jumping to 7.75 percent, its highest level in
eight months. They shifted money into Treasuries, German Bunds
and other less risky government debt, analysts said.
    Also on Friday, a top Chinese official signaled that Beijing
might tolerate economic growth significantly below 7 percent in
the second half of the year. 
    Inflation in the United States has softened this year,
complicating the Fed's decision whether to reduce its $85
billion monthly bond purchase program later this year.
    U.S. inflation data released on Friday, however, suggested
the worrisome price trend might be turning around with the
expected pick-up in business activity and consumer spending in
the second half. The government said producer prices grew 0.8
percent in June, faster than the 0.5 percent forecast by
economists polled by Reuters.
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