TREASURIES-Yields rise as Fed pullback seen on track
* Yields increase, Fed seen likely to pare bond purchases soon * Fed meeting minutes offer few new clues over timing * Fed to buy $1.25 bln - $1.75 bln debt due 2036-43 on Thursday By Karen Brettell NEW YORK, Aug 21 (Reuters) - U.S. Treasuries yields rose on Wednesday after the Federal Reserve released minutes of its July meeting, which offered few new clues on when the central bank is likely to pare back its bond purchase program but maintained expectations it is likely to occur soon. A few Federal Reserve officials last month thought it would soon be time to slow the pace of the bond buying "somewhat," but others counseled patience, according to the meeting minutes. Worries the Fed could soon slow its massive bond-buying program have sent 10-year yields soaring by more than full percentage point since the beginning of May, with yields holding just under two-year highs on Wednesday. "I think this sets them up for tapering to begin sooner rather than later," said Sam Diedrich, a portfolio manager at for Pacific Alternative Asset Management Company (PAAMCO) in Irving, California. "Growth has been moderate and modest, not exceeding expectations but still showing a lot of resilience to some of the government fiscal headwinds that were felt in the first half of the year." Benchmark 10-year notes dipped 8/32 in price to yield 2.86 percent, up from 2.82 percent late on Tuesday. They rose to two-year highs of 2.90 percent on Monday. Thirty-year bonds slipped 17/32 in price to yield 3.88 percent, up from 3.82 percent late on Tuesday. They got as high as 3.914 percent on Monday. A Reuters poll showed last Wednesday that a majority of economists expect the Fed to reduce bond purchases at its Sept. 17-18 policy meeting, with a consensus expecting the U.S. central bank would reduce purchases by $15 billion initially. The Fed will purchase between $1.25 billion and $1.75 billion in bonds due from 2036 to 2043 on Thursday as part of its ongoing purchase program. U.S. bond investors have been moving to the sidelines on concerns over what impact a reduction in Fed purchases will have on the market, while some investors are also being forced to sell after getting caught in wrongway trades that were meant to benefit from a reduction in yields. Yields fell before the release of the minutes as some investors expected that some Fed officials might have voiced more concerns about paring the Fed's $85 billion-a-month purchase program in the near term. "The market was leaning dovish. Everyone was hoping the minutes to be very dovish and there would be more expansion about the Fed's concerns about inflation but you didn't really get that," said Mary Beth Fisher, head of U.S. interest rate strategy at Societe Generale in New York. U.S. economic growth has continued to show resilience in recent weeks, despite fears that rising yields may weigh on mortgage borrowing and harm the housing recovery. On Wednesday, data showed U.S. home resales rose in July to their highest level in over three years, suggesting a sharp increase in mortgage rates is having only a limited impact on the housing market's recovery. "Rising rates will ding sales the next couple of months, but it will not derail the housing recovery," said Ryan Sweet, senior economist with Moody's Analytics in West Chester, Pennsylvania. If growth remains on track many expect bond yields will continue to increase. "I think you are going to see a prolonged period where rates gradually move higher and I think it will happen in fits and starts," said PAAMCO's Diedrich. "I think you will see some sharp moves up, followed by weak recoveries, so I think there's going to be higher volatility in rates." At the same time, others saw much of the selloff in bonds as having perhaps exhausted itself in the near term, after a dramatic rise in which 10-year yields have climbed from 1.60 percent at the beginning of May. "I would think that at least 80 percent of the selloff is behind us, and you can even make the case that we've overshot fair value. But at the same time, it's difficult to handicap the degree of herd mentality out there and how far that could push the market," said Robert Tipp, chief investment strategist at Prudential Fixed Income in Newark, New Jersey. The Fed will hold its annual policy conference in Jackson Hole, Wyoming, on Thursday and Friday, but Chairman Ben Bernanke will not be attending, unlike in previous years. Traders are speculating over who will take over from Bernanke, with President Barack Obama expected to announce his decision in the fall. Fed Vice Chairman Janet Yellen and former Treasury Secretary Lawrence Summers are considered the front-runners. Traders are also watching for further signs of weakness in emerging markets, which have been roiled in recent days on concerns over the Fed pullback. The rout in emerging markets gathered pace on Wednesday, extending to the Turkish lira, which, with India's rupee, hit record lows in a selloff prompted by the expected tailing off of extraordinary U.S. money printing.
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