TREASURIES-Bonds slip before Fed, strong housing starts weigh

Wed Dec 18, 2013 10:31am EST

Related Topics

* Market awaits Fed policy decision

* Rise in U.S. housing starts shows resiliency - economists

* Treasury to auction five-year notes at 1130 EST (1630 GMT)

By Ellen Freilich

NEW YORK, Dec 18 (Reuters) - U.S. Treasuries prices slipped on Wednesday after the government reported a better-than-expected jump in U.S. housing starts in November and on caution before the Federal Reserve's statement concluding its two-day policy meeting.

U.S. equities opened higher, in sync with gains in European shares that were aided by solid German sentiment data. Gains in riskier assets like stocks tend to diminish demand for safe-haven U.S. debt.

"The Treasury market is cheaper this morning and all eyes are on the Federal Reserve announcement at 2 o'clock, with a number of market participants increasing their odds for tapering given positive labor market and growth data over the past several weeks," said Jake Lowery, Treasury trader and portfolio manager for global interest rates at ING U.S. Investment Management.

News that U.S. housing starts rose to their highest level in nearly six years in November fit the recent pattern of improved economic data, with starts for multi-family homes jumping 26.8 percent.

"Housing starts posting a new high for this cycle underscores the point that the interest-rate-sensitive sectors of the economy are experiencing strength that may allow the Fed to pull back on accommodation," Lowery said.

Supply was expected to be another source of pressure on the Treasury market.

"With two consecutive weeks of supply - including a five-year auction just before Fed statement today and seven-year note and TIPS auctions tomorrow - supply is unusually heavy given the constrained holiday calendar and that could put some further pressure on the curve," Lowery said.

The Treasury will sell $35 billion in five-year debt on Wednesday. On Thursday, it will sell $29 billion in seven-year notes ; and $16 billion in five-year Treasury Inflation-Protected Securities.

But for the moment, traders remained focused on what the Fed will say about its stimulus program when it concludes a two-day policy meeting. Many analysts expect a tapering announcement in the first quarter of next year, but say a move to rein in bond buying this week is possible.

"Strong data and taking risk off the table ahead of the FOMC decision is weighing on prices," said Thomas di Galoma, co-head of fixed-income rates at ED&F Man Capital in New York.

Benchmark 10-year Treasury notes were down 11/32, their yields rising to 2.88 percent, toward the high end of their recent range.

The 30-year bond price was down 21/32, its yield rising to 3.91 percent.

A Reuters poll last week showed 32 economists forecast the U.S. central bank would act in March, while 22 said it would scale back its $85 billion monthly bond-buying program in January. Twelve economists expected a tapering announcement this week.

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