TREASURIES-U.S. bond prices rise before three-year supply
* U.S. to sell $30 billion in new three-year notes * Fed to buy up to $1.50 billion TIPS for QE3 By Richard Leong NEW YORK, Dec 10 (Reuters) - U.S. Treasuries prices rose on Tuesday as investors bought to exit bearish bets in advance of a $30 billion auction of three-year government notes, part of this week's $64 billion in coupon-bearing government debt supply. Bond yields retreated further from their three-month highs as traders reconsidered whether the Federal Reserve would shrink its third round of quantitative easing at its two-day policy meeting next week in the wake of an upbeat November payrolls report and other encouraging economic data. Even if the Fed were to signal a pullback in bond purchases, policy-makers will likely opt for a small one in order to not trigger a bond market sell-off, which would send long-term interest rates higher and hurting the housing market. "We might see a gradual tapering. The Fed won't let rates go much higher," said Larry Milstein, head of government and agency trading at R.W. Pressprich & Co. in New York. At 11 a.m. (1600 GMT), the U.S. central bank will buy $1.00 billion to $1.50 billion of Treasuries Inflation Protected Securities, part of its intended $45 billion in government debt purchases in December. The Treasury Department will replenish the market with the sale of $30 billion in three-year government notes at 1 p.m. (1800 GMT). It will hold a $21 billion reopening of 10-year notes on Wednesday and a $13 billion auction of a prior 30-year bond issue on Thursday. In the when-issued market, traders expected the new three-year note to sell at a yield of 0.637 percent, compared with 0.644 percent yield on the three-year notes sold in November. On the open market, the benchmark 10-year note last traded 12/32 higher in price with a yield of 2.812 percent, down 4.5 basis points from late on Monday. The 10-year yield climbed to 2.932 percent on Friday, which was the highest since Sept. 11, in a reaction to a stronger-than-forecast jobs report for November. "The market has fully priced in a tapering. A 2.90 percent yield might be an overshoot," said John Herrmann, director of interest rates strategy with Mitsubishi UFJ Securities USA in New York. The 30-year Treasury bond was last up 23/32 in price after rising more than 1 point earlier. The 30-year yield fell 4 basis points to 3.848 percent after hitting 3.980 percent last Friday.
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