TREASURIES-U.S. bond prices fall as Fed seen more hawkish

Wed Oct 30, 2013 4:48pm EDT

Related Topics

* Fed statement says downside risks have diminished
    * Analysts say Fed statement more hawkish than expected
    * Treasury sells $29 bln in 7-year notes at high yield of
1.87 pct
    * U.S. private job growth slows in October - ADP

    By Luciana Lopez
    NEW YORK, Oct 30 (Reuters) - U.S. Treasuries prices traded
down on Wednesday as Federal Reserve policymakers said downside
risks to the economy had lessened, a more hawkish observation
than markets had expected.
    Concluding a two-day meeting, the Fed extended its
$85-billion-per-month bond buying program in a continued bid to
prop up the world's biggest economy.
    But analysts noted that Fed policymakers removed a reference
to tighter financial conditions.
    "It was much less dovish than was expected, which is why we
saw the reaction in markets," said Tom Porcelli, chief U.S
Economist at RBC Capital Markets in New York.
    Treasuries pared early gains to trade lower after the Fed
statement. The benchmark 10-year note fell 8/32 to
yield 2.534 in the afternoon, compared with a yield of 2.507
percent late Tuesday.
    The 30-year bond also gave up early gains to
fall 11/32 in price, yielding 3.640 percent. That compared with
a yield of 3.621 percent late on Tuesday.
    However, the Fed also nodded to a recent fiscal policy fight
that likely damaged the economy in the fourth quarter. The
federal government shut down in the first half of October as
congressional Republicans sought to undermine President Barack
Obama's signature healthcare law as a condition of funding the
government.
    Due to that shutdown, "any improvement with the data will be
viewed with skepticism and any disappointing data will be pinned
on the shutdown," said Neil Dutta, head of U.S. economics at
Renaissance Macro Research in New York. 
    "March is the most likely for them to dial back on the QE
program," he said, referring to the Fed stimulus, known as
quantitative easing. "The more important question in 2014 for
the Fed is at what point they will adjust their rate guidance?" 
  
    Recent data show the critical labor and housing sectors had
already slowed even before the shutdown in the first half of
October, adding support to views that the Fed will not be ready
to let the economy stand on its own for months.
    Analysts say the Fed remains frustrated by the persistent
sluggishness in the labor market despite three rounds of
quantitative easing that has tripled the size of its balance
sheet and resulted in almost five years of near-zero interest
rates.
    Payroll processor ADP said on Wednesday U.S. companies added
130,000 workers in October, 20,000 fewer than economists had
forecast. Just four months earlier, they expanded their payrolls
by about 190,000. 
    
 
    
    Some analysts said that with the Fed staying the course,
Treasuries are likely to remain rangebound for a while.
    "It would take something dramatic from here, perhaps a much
better-than-expected holiday season, for rates to go higher,"
said Paul Montaquila, vice president, fixed-income investment
officer, at Bank of the West's capital markets division in San
Francisco.
    "We will be in this trading range for quite some time, with
2.5 percent on the 10-year yield being the mean and a range of
about 2.35 percent to 2.75 percent." 
    In addition, the U.S. Treasury sold $29 billion in
seven-year debt at a high yield of 1.870 percent on Wednesday.
    The auction drew a strong bid-to-cover ratio at 2.66,
compared with an average of 2.51 in the last four auctions.
    The government sold $32 billion in two-year notes and $35
billion in five-year debt in the previous two days to steady, if
unspectacular, demand.
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