TREASURIES-Prices rise slightly to start holiday-shortened week

Mon Nov 25, 2013 2:58pm EST

Related Topics

* Treasury sells $32 bln in two-year notes at high yield of 0.300 percent

* Pending home sales fall to a 10-month low in October

* Market to close on Thursday for Thanksgiving holiday, close early on Friday

* Nonfarm payrolls, due next week, to be key for market

By Luciana Lopez

NEW YORK, Nov 25 (Reuters) - U.S. Treasury debt prices inched higher on Monday after housing data proved weaker than expected, with a light economic slate for coming sessions because of the holiday-shortened week.

Contracts to buy previously owned U.S. homes fell for a fifth straight month in October, hitting a 10-month low and adding to signs of cooling in the housing market.

While Treasuries prices extended modest gains after those figures and a few other housing indicators were on tap for the rest of the week, analysts said they were instead focused on coming figures on the health of the U.S. job market, which will be important for gauging the Federal Reserve's future policy moves.

The matter of when the Fed might slow its $85 billion per month in purchases of Treasuries and mortgage-backed securities has preoccupied global markets.

Until that becomes clear, analysts said markets will stay rangebound.

"The die has been cast. We're in this trading range, somewhat obsessing about whether the Fed's going to taper in December or January or March," said Wilmer Stith, portfolio manager of the Wilmington Broad Market Bond Fund.

Stith said he expected the yield on benchmark 10-year notes to stay within the 2.5 percent to 3 percent range.

The uncertainty around the Fed's future policy direction has injected risk into bond markets.

Janet Yellen, who is expected to take over as chair of the U.S. central bank near the start of the year, could also surprise markets, though she is viewed as dovish.

Still, the Fed could choose a cautious path when it does pull back on its quantitative easing program, said Deepak Narula, founder of Metacapital Management LP in New York, who oversees $1.45 billion. His main fund last year returned more than 40 percent.

"Probably the Fed is going to be fairly careful in pulling back on the stimulus," he said at last week's Reuters Investment Outlook Summit. "And so even as they taper and even as they end QE, it's probably going to come with forward guidance that's more extended" to show lower interest rates for longer into the future.

With anchored short-term rates, then, longer-term rates are more vulnerable, he added.

The benchmark 10-year Treasury note rose 4/32 in price to yield 2.741 percent on Monday, compared to 2.754 percent on Friday.

The 30-year bond gained 4/32 in price to yield 3.834 percent on Monday, from 3.84 percent late on Friday.

Month-end portfolio rebalancing could also support bonds toward the end of the week. Portfolios managed against benchmark indexes often buy longer-dated Treasuries around month-end.

With analysts expecting thin trading in the holiday-shortened week, next week's nonfarm payrolls could take on added significance.

Economists in a Reuters poll expect that report, due on Dec. 6, to show a gain of 185,000 payroll positions in November.

Last month's figure, at 204,000, came in better than expected, fueling speculation that the Fed could pare its bond buying program in coming months, if not at the end of this year.

"Our view is the economy is creating too many nonfarm payroll jobs to not call this economy normal," said Christopher Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York. "We don't see a role for monetary policy to play."

The Treasury also kicked off this week's debt sales with an auction of $32 billion in two-year notes on Monday.

The auction fetched a high yield of 0.300 percent, slightly lower than the market had expected. At 3.54, the bid-to-cover ratio was the highest since April.

The Treasury will sell $35 billion in five-year notes and $29 billion in seven-year notes later in the week.

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