TREASURIES-U.S. bond prices rise as investors await Fed tapering decision

Tue Sep 17, 2013 3:18pm EDT

Related Topics

* U.S. consumer inflation remained muted in August
    * Foreigners resumed buying Treasuries in July
    * Investors add longer-dated bonds after Summers news-JPM
    * Fed buys $1.47 billion long-dated Treasuries


    By Richard Leong
    NEW YORK, Sept 17 (Reuters) - U.S. Treasury debt prices rose
on Tuesday as investors awaited a decision from the Federal
Reserve on a possible reduction of its bond-purchase stimulus
and clues on how it might manage short-term interest rates.
    The Federal Open Market Committee, the U.S. central bank's
policy-setting group, is widely expected to pare back its $85
billion monthly purchases of Treasuries and mortgage-backed
securities at its two-day meeting, starting on Tuesday.
    The U.S. labor market, while improving, remains fragile with
job growth running below the pace seen in prior economic
recoveries. This might cause the FOMC to begin tapering by a
modest $10 billion to $15 billion, analysts said. 
    "The jobs market continues to grow, but at a pace that is
less than ideal. Nonetheless, all indications are that the Fed
is poised to announce tomorrow that they will begin to pare back
their bond purchases," said Jim Baird, chief investment officer
at Plante Moran Financial Advisors in Kalamazoo, Michigan.
    Government data showing inflation in check also supported
bids for longer-dated issues. Rising inflation erodes bond
values in the long run. 
    Moreover, some bets that the Fed might delay tapering until
later this year helped lift bond prices, analysts said.
    "The risk is skewed on a dovish outcome," said Anthony
Valeri, fixed income strategist at LPL Financial in San Diego.
"There's a chance they (the Fed) might not do anything at all.
That'll be positive for the bond market." 
    However, gains on Wall Street stocks and weaker German Bund
prices kept a lid on bids for Treasuries, analysts said.
    Benchmark 10-year Treasury notes were trading
3/32 higher in price with a yield of 2.858 percent, down from
2.862 percent late on Monday, while two-year notes 
were little changed in price, yielding 0.384 percent.
    The 30-year bond was up 11/32 in price with a
yield of 3.848 percent, down from 3.863 percent late Monday.
    Long-dated maturities were buoyed by the Fed's $1.47 billion
purchases of Treasuries due February 2036 through August 2043 on
Tuesday, which were part of its planned $45 billion of
Treasuries purchases in September. 
    
  
    Treasury yields held near their lowest levels so far in
September after falling on Monday in the wake of news that
Lawrence Summers, a former Treasury secretary and former top
economic aide to President Barack Obama, withdrew from
consideration as Federal Reserve chairman.
    The news on Sunday eased fears of more aggressive Fed policy
tightening if he were in charge of overseeing the monetary
policy of the world's biggest economy.
    With Summers out of the running, traders raised expectations
that current Fed vice chair Janet Yellen would be Obama's
nominee for the central bank's top job.
    Wall Street seems more comfortable with Yellen as the next
Fed chair because she is expected to take a gradual approach to
reducing stimulus and to raise interest rates as economic growth
has stayed sub-par and inflation has remained benign, analysts
said.
    The U.S. Labor Department said the consumer price index
inched up 0.1 percent in August, less than the forecast 0.2
percent increase, while the National Association of Home
Builders said its housing market index held steady at 58 in
September, near eight-year highs despite the surge in mortgage
rates this summer.
    Given this view about a fairly smooth transition in Fed
leadership in a slow-growing economy, bond investors stepped
back into longer-dated Treasuries in the latest week.
    In a poll of its Treasuries clients released on Tuesday,
J.P. Morgan Securities said 21 percent of those surveyed on
Monday said they held more longer-dated government debt versus
their portfolio benchmarks, compared with 15 percent a week ago.
    Data showed foreign appetite for Treasuries returned in July
after overseas investors dumped them in June during a dramatic
bond market sell-off on worries about the Fed paring back its
bond purchases later this year. 
    But the longer-term state of the United States' finances
remains questionable.
    The Congressional Budget Office said the federal deficit
would grow to 6.4 percent of the domestic economy in 2038,
versus 3.9 percent this year, due to rising costs for government
programs for retirement and medical care.
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