TREASURIES-Prices dip before Fed minutes, 10-year note sale

Wed Oct 9, 2013 9:18am EDT

Related Topics

* Prices fall slightly before Fed minutes
    * Potential Yellen rally stemmed by Washington gridlock,
supply
    * Treasury to sell $21 billion of 10-year notes
    * October Treasuries bill yields elevated, repo costs rise

    By Karen Brettell
    NEW YORK, Oct 9 (Reuters) - U.S. Treasuries prices dipped
slightly on Wednesday as investors awaited minutes from the
Federal Reserve's last policy meeting, which is expected to
reveal more clues about why the U.S. central bank decided
against paring its $85 billion a month bond purchase program,
and ahead of new Treasury supply.
    The Fed minutes come as U.S. President Barack Obama is
preparing to nominate Fed number two Janet Yellen on Wednesday
to run the world's most influential central bank. The advocate
for aggressive action to stimulate U.S. economic growth through
low interest rates and large-scale bond purchases would replace
Ben Bernanke, whose second term as Fed chairman expires on Jan.
31. 
    Treasuries have largely traded sideways for the past two
weeks, with many investors hesitant to enter new trades due to
political gridlock in Washington. The U.S. government entered
its ninth day of partial shutdown on Wednesday and fears have
been rising that political dysfunction could disrupt an increase
in the debt ceiling.
    Some investors fear that a resolution to raise the debt
ceiling will reduce the safety bid for Treasuries, sending
yields higher, while others see a continuing gridlock adding to
demand for bonds. These factors, and impending new sales of
10-year and 30-year Treasuries, offset any rally from Yellen's
nomination.
    "One side fears that you will get an agreement (in
Washington) and the market will probably be pressured, and the
other side fears of it continuing and dragging on and continuing
to choke some growth out of the economy," said Sean Murphy, a
Treasuries trader at Societe Generale in New York.
    "You're kind of stuck until you get some resolution here,
but in the meantime you're taking down some supply," he added.
    Benchmark 10-year Treasury notes were last down
2/32 in price to yield 2.65 percent, up from 2.64 percent late
on Tuesday.
    The Treasury will sell $21 billion in 10-year notes on
Wednesday, the second sale of $64 billion in new coupon-bearing
supply this week. It will also sell $13 billion in 30-year bonds
on Thursday.
    Many U.S. economic releases issued by the government,
including Wednesday's wholesale trade data and the crucial
monthly payrolls data that had been scheduled for last Friday,
have been delayed by the shutdown, muddying insight into the
state of the economy.
    The partial government shutdown is seen hurting economic
growth, which has added to speculation that the Fed may not
begin paring back its bond purchases until next year.
    Short-dated Treasury bill yields also remained elevated on
Wednesday, and the cost of financing trades through repurchase
agreements rose, as investors avoided U.S. debt that comes due
in late October. Notes due at the end of October are most at
risk of delayed payments if the government fails to increase its
$16.7 trillion debt ceiling.
    U.S. Treasury Secretary Jack Lew has warned Congress the
United States would exhaust its borrowing capacity no later than
Oct. 17, at which point it would have only about $30 billion in
cash on hand. 
    Treasuries bills that mature on Oct 24 are yielding 39 basis
points, much higher than longer-dated debt that matures outside
of what investors see as the danger zone. Three-month 
and six-month bills are yielding 0.05 percent and
0.08 percent, respectively.
    The cost of borrowing funds overnight against Treasuries in
repo also jumped to around 15 basis points on Wednesday, up from
around 7 basis points on Tuesday.
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