TREASURIES-U.S. bond yields near 2-year high on economic hopes
* U.S. yields jump on encouraging U.S., European data * Fed's bond purchase may shrink but nothing set -Lockhart * Investors add longer-dated Treasuries in week -JPMorgan * Fed buys $1.413 billion in TIPS due 2040-2043 By Karen Brettell and Richard Leong NEW YORK, Aug 13 (Reuters) - U.S. Treasuries yields approached two-year highs on Tuesday after data suggested Europe's struggling economy may have turned the corner and a resilient U.S. consumer sector would generate faster growth in the second half of the year. Mildly encouraging data on domestic retail sales in July supported the notion the Federal Reserve might dial back its $85 billion monthly bond purchase program, its third round of quantitative easing, also known as QE3. A top Fed official said he would not rule out the possibility the central bank might reduce QE3 in September, but such a move depends on whether evidence shows the economic recovery would stay on track with less monetary stimulus. "People were placing a higher probability of tapering in September," Jason Brady, head of fixed income at Thornburg Investment Management in Santa Fe, New Mexico, said of the market selloff. On above-average volume, benchmark 10-year Treasury notes fell 27/32 in price to yield 2.721 percent, up from 10 basis points on the day. The 10-year yield was just over 3 basis points from a two-year high of 2.755 percent on July 8. Thirty-year bonds shed 1-10/32 in price to yield 3.758 percent, up 7.5 basis points from late Monday. The 30-year yield traded at a two-year high of 3.793 percent on July 10. "People were expecting a grind lower in yields after the refunding supply and they didn't get it," Brady said. A widely-followed survey released earlier from J.P. Morgan Securities showed investors raised their stakes in longer-dated Treasuries in hopes of lower yields following last week's $72 billion in coupon-bearing supply. "The Treasury market bear trend is RESUMING," MacNeil Curry, technical strategist at Bank of America Merrill Lynch wrote in a research note on Tuesday. He added investors should sell into any rebound. ENCOURAGING DATA Earlier, Treasuries prices fell with German Bunds after data on German analyst and investor sentiment improved more than expected in August and a report showed British house prices rising at the fastest pace in seven years. U.S. government bonds extended price losses and yields hit session highs after a gauge of U.S. consumer spending rose in July at its fastest pace in seven months. However, the government said the level of U.S. business inventories didn't change in June, falling short of a forecast 0.2 percent rise. This led some economists to trim their forecasts on the expected upward revision to the gross domestic product in the second quarter, which was originally reported at a 1.7 percent annualized rate. Sluggish growth has kept inflation below the Fed's target but might be enough for the central bank to reduce its bond-purchase stimulus, Atlanta Fed President Dennis Lockhart said. "I wouldn't rule out September," he told reporters after a speech in Atlanta. "As I see it, a decision to proceed - whether it is in September, October, or December - ought to be thought of as a cautious first step." The Fed bought inflation-linked debt on Tuesday, instead of its more regular nominal Treasuries purchases, reducing support for the market. The central bank purchased $1.413 billion in Treasury Inflation-Protected Securities (TIPS) due from 2040 to 2043 as part of its ongoing QE3 program. The release next Wednesday of the minutes from the Fed's July meeting is likely to be the next focus as investors look for new clues on whether Fed officials were adopting a more cautious outlook on the economy. "There was a divide that came out of that meeting. Some people thought it was relatively dovish, which I didn't see. Maybe we will get some internals about what they were thinking about tapering," said Tom Tucci, head of Treasuries trading at CIBC in New York.
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