TREASURIES-U.S. bond yields hover near two-year highs
* Euro zone exits from 18-month recession * U.S. July producer price index unchanged, misses forecast * Fed buys $1.509 billion in long-dated Treasuries * St. Louis Fed chief Bullard raises low-inflation concerns By Richard Leong NEW YORK, Aug 14 (Reuters) - U.S. Treasuries yields held near two-year highs on Wednesday as bargain-buying and muted inflation data soothed worries that benchmark yields would soon make a run toward 3 percent. A bond market sell-off on Monday and Tuesday caused yields to post their biggest two-day increase since early July on speculation that signs of U.S. and European economic growth might spur the U.S. Federal Reserve to dial back its bond-purchasing stimulus program as early as September. But on Wednesday, weaker-than-expected readings on U.S. producer prices in July fanned expectations that inflation would stay below the Fed's target, potentially keeping the central bank from cutting its $85 billion a month in bond purchases. "People are trying to figure out the timing on the Fed's tapering. People are reacting to every piece of economic data," said Brian Rehling, chief fixed-income strategist at Wells Fargo Advisors in St. Louis. A Reuters poll released on Wednesday showed a majority of economists expect the Fed to pare bond purchases at its Sept. 17-18 policy meeting. Data on Thursday will include the July consumer price index, jobless claims for the most recent week and a U.S. mid-Atlantic business survey. On Wednesday, the Fed bought $1.509 billion of government debt that will mature February 2037 to August 2042, the latest purchase of its third round of quantitative easing, or QE3. It will purchase between $3 billion and $4 billion in notes due in 2019 and 2020 on Thursday. Benchmark 10-year Treasury notes rose 3/32 in price to yield 2.708 percent, down from 1.3 basis points from late on Tuesday. The 10-year yield had touched 2.730 percent earlier on stronger-than-expected European growth data, reaching a level just 2.5 basis points below the 23-month high set in early July, according to Reuters data. The 30-year bond was up 7/32 in price, its yield at 3.746 percent, down 1.3 basis points from Tuesday's close. Earlier, the yield traded at about 3 basis points below a nearly two-year peak set on July 10. Bonds have come under pressure this week as investors exited bullish bets that prices would rise after last week's $72 billion U.S. Treasury debt sale. "In the last few days, some people were caught off guard. Some longs were forced out of the market," said Justin Lederer, Treasury strategist at Cantor Fitzgerald in New York. Treasuries fared slightly better than German bunds, with their 10-year yield spread narrowing slightly to 88.75 basis points after second-quarter data showed the economies of Germany and France grew more quickly than expected, pulling the euro zone out of a 1-1/2 year-long recession. "Europe was not as doom-and-gloom as a year ago. Our economy is also a bit better," Cantor's Lederer said. After the release of French and German economic growth data in the European morning, Treasuries prices slumped, prompting some bargain-buying. The buying picked up after the U.S. government said producer prices were flat in July, which suggested domestic inflation will likely stay below the Fed's 2 percent target for the foreseeable future. St. Louis Fed President James Bullard, a voter on the Fed's policy-setting group this year who has expressed reservations about reducing bond purchases too soon, said on Wednesday the low U.S. inflation is a worrisome sign for the economy, He added that it might be a factor that policymakers will consider when deciding whether to scale back bond purchases. "Inflation has been running very low. I have been concerned about low inflation," Bullard said at a Rotary Club luncheon in Paducah, Kentucky. "There has not been much indication, so far, that it has been ticking back up toward target." Even if the Fed starts to scale back its bond purchases, some analysts do not anticipate benchmark yields will rise much further from current levels as economic growth will likely hover near the 2 percent level at least for the rest of the year. "I don't think we are going to see a run toward 3 percent. We need to see much better data," said Wells Fargo's Rehling.
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