TREASURIES-Prices rally as data supports Fed keeping stimulus

Tue Sep 24, 2013 3:32pm EDT

Related Topics

* Home prices slow rate of gains, consumer confidence dips

* Bond prices extend post-Fed momentum

* U.S. 2-year note high yield 0.348 percent

By Wanfeng Zhou

NEW YORK, Sept 24 (Reuters) - U.S. Treasuries prices rose on Tuesday for the third straight session after weaker economic data reinforced expectations the Federal Reserve will not scale back stimulus in the near term.

The bond market extended its bullish momentum sparked by last week's Fed decision to maintain its current $85-billion-a-month bond buying. Fewer asset purchases would hurt bond prices and drive yields higher.

U.S. home prices slowed their rate of gains in July and consumer confidence dipped this month, data showed on Tuesday, underscoring the fragile state of the economic recovery. Separately, a Richmond Fed index showed manufacturing sector activity stalled and employment weakened.

"The market is rallying here as it realizes that the Fed will be not tapering quantitative easing for the immediate future," said Gary Pollack, head of fixed income trading at Deutsche Bank Private Wealth Management in New York.

Benchmark 10-year notes rose 14/32 in price, their yields easing to 2.66 percent from 2.71 percent late on Monday. Thirty-year bonds rose 1-1/32. Their yields eased to 3.67 percent from 3.73 percent late on Monday.

The yield curve flattened with the spread between two- and 30-year yields narrowing to 334 basis points from 339 at Monday's close. The difference between 10- and two-year yields narrowed to 232 basis points from 237.

"The yield curve is just too wide from a historical perspective and bond investors recognize that," said Tom di Galoma, head of fixed-income rates sales at ED&F Man Capital in New York. "People are putting on curve flattening trades."

Treasuries prices have risen and yields have fallen since the Fed decided to put off unwinding any of its monetary accommodation until it had more confidence in the sustainability of the still-subdued economic recovery.

"The market is still digesting the news from the Fed's very significant change in guidance last week extending out to 2016," said Jake Lowery, Treasury trader at ING U.S. Investment Management in Atlanta.

"The Federal Reserve has clearly laid out its policy objectives. They will encourage low rates for several years to reduce unemployment. That's very supportive for low yields on Treasuries."

The S&P/Case Shiller composite index of 20 metropolitan areas rose 0.6 percent on a seasonally adjusted basis in July, less than the 0.8 percent gain predicted by a Reuters poll.

The Conference Board, an industry group, said its index of consumer attitudes fell to 79.7 from a revised 81.8 in August, compared to economists' expectations for 79.9.

The Treasury sold $33 billion in two-year notes at a high yield of 0.348 percent. It will sell five-year notes on Wednesday and seven-year notes on Thursday.

The Treasury's weekly sale of four-week bills on Tuesday, however, garnered the most tepid bid since Sept. 4 when the auction was $15 billion, Thomas Simons, a money market economist at Jefferies, said in a note to clients.

"Last week, the auction generated very strong statistics and stopped at zero for the first time since early May," he noted. "This week, concern about the October 24 maturity date as it related to potential debt ceiling issues, combined with the Fed's ongoing test of the fixed-price, full-allotment reverse repurchase program generated a much more passive bid."

The New York Fed has begun testing an overnight, fixed-rate full-allotment, reverse repurchase agreement facility in a series of daily operations.

As part of its ongoing efforts to foster economic activity and lower unemployment, the New York Fed bought $1.474 billion in Treasury coupons with maturity dates ranging from Feb. 15, 2036 to Feb. 15, 2043.

Conflict over raising the U.S. debt limit tended to support U.S. debt, but Moody's, the debt rating agency, said it expected the U.S. debt limit to be increased.

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