TREASURIES-Prices edge higher before Fed buyback

Fri Jul 19, 2013 9:36am EDT

* Prices increase before Fed 10-year note buyback
    * Corporate rate hedging seen weighing on the market
    * Treasury to sell $99 billion new supply next week

    By Karen Brettell
    NEW YORK, July 19 (Reuters) - U.S. Treasuries prices edged
up on Friday before the Federal Reserve was due to buy 10-year
notes as part of its ongoing purchase program, with some traders
expecting that the market could come under pressure later in the
day as companies sell rate locks in anticipation of new bond
sales.
    The Federal Reserve will buy between $2.75 billion and $3.50
billion in debt due 2020 to 2023 on Friday as part of its
ongoing purchase program.
    That may be an opportunity for traders to enter into short
positions, before companies are expected to sell rate locks and
as the Treasury is due to sell $99 billion in new coupon-bearing
supply next week.
    "On the last few Fridays is there has been a decent amount
of rate lock selling from corporations, which could pressure the
market," said Kevin Walter, head of Treasuries trading at BNP
Paribas in New York.
    Companies sold around $16 billion in high grade debt this
week, led by big banks including Citigroup, Bank of
America, and Goldman Sachs, and a similar amount
of investment grade issuance is expected next week, according to
IFR, a Thomson Reuters publication.
    Benchmark 10-year notes were last up 2/32 in
price to yield 2.52 percent, down from 2.53 percent late on
Thursday.
    Safe haven U.S. government bonds were supported on Friday
after the City of Detroit filed for bankruptcy on Thursday, the
largest-ever municipal bankruptcy in U.S. history, and
technology giants Google and Microsoft both
announced disappointing quarterly results, adding to concerns
over how far the ongoing equity rally will extend.
    At the same time, anticipation of rate lock selling was seen
limiting price gains.
    "There has been constructive news for bonds over the last 20
hours or so, we had a pretty successful TIPS auction, some
weakness out of Google and Microsoft, and the bankruptcy
announcement out of Detroit, but the market can't really get up
and go and I think that's in anticipation of some of the rate
lock selling later this afternoon," Walter said.
    The Treasury sold $15 billion in 10-year Treasuries
Inflation-Protected Securities (TIPS) on Thursday to solid
demand.
    Demand for intermediate-dated Treasuries, which are the most
sensitive to Fed rate policy, will also be tested next week when
the Treasury sells $35 billion in two-year notes on Tuesday, $35
billion in five-year notes on Wednesday and $29 billion in
seven-year debt on Thursday.
    "I think the five year is a huge test. We've made so many
strides in the five year that the idea that we can continue to
do that and are rewarded for risking more capital at next week's
sale will be a bit vote of more or less confidence in the entire
economic growth story," said Jim Vogel, an interest rate
strategist at FTN Financial in Memphis, Tennessee.
    Five-year notes yields have rallied from 1.63
percent on July 8 to 1.30 percent on Friday, as Fed officials
have tried to ease fears over the pace in which the U.S. central
bank will withdraw its record stimulus.
    Five-year fell to their lowest levels in almost a month
after Fed Chairman Ben Bernanke told a House of Representatives
panel on Wednesday that the Fed's plans to scale back its bond
purchases later this year are not set in stone, and still depend
on the strength of the economy.
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.