TREASURIES-U.S. bond prices fall in light pre-Christmas trade

Tue Dec 24, 2013 11:44am EST

Related Topics

* Two-year, 10-year yields close to three-month highs
    * Durable goods orders grew more than forecast in November
    * Nov new homes sales dipped, prior months revised higher
    * U.S. bond trading to end early, to close Christmas Day


    By Richard Leong
    NEW YORK, Dec 24 (Reuters) - U.S. Treasuries prices fell on
Tuesday with benchmark yields hovering near three-month highs as
investors trimmed their bond holdings ahead of a shortened
session before Christmas.
    The bond market will stop trading early at 2 p.m. EST (1900
GMT), and will be closed Wednesday.
    Worries over when the Federal Reserve might raise short-term
interest rates after it stops buying bonds have bogged down the
market, especially among medium-term issues.
    A stronger-than-expected report on durable goods orders
supported the view the U.S. economy might be gathering some
momentum into early 2014, raising the risk the U.S. central bank
would accelerate its reduction of bond purchases.
    The news durables goods rose 3.5 percent last month spurred
selling in longer-dated Treasuries, which the Fed has targeted
to hold down mortgage rates and other long-term borrowing costs
to stimulate the economy. 
    "The path of least resistance right now is lower bond prices
and higher yields," said John Brady, managing director of
interest rate futures sales at R.J. O'Brien and Associates in
Chicago.
    
    On light trading volume, benchmark 10-year Treasury notes
 fell 12/32 in price to yield 2.970 percent, up 4
basis points from late on Monday. The 10-year yield was 3 basis
points short of the two-year high set in September.
    The yield on two-year notes was last 0.395
percent after hitting a three-month high at 0.399 percent
earlier. 
    Thirty-year bonds declined 24/32 in price,
yielding 3.887 percent, up 4 basis points from late on Monday. 
    The yield gap between five-year and 30-year
Treasuries, which is seen as gauge of traders' view on changes
in the Fed's interest rate policy and its bond purchase program,
held for a third straight session near 2.15 percent, which was
its tightest level since September.
    A sharp narrowing of the yield differences between medium-
and long-dated Treasuries since last week signaled a combination
of worries about a rate increase not too long after the Fed ends
its purchase program and doubts about the Fed's communication as
an effective policy tool.
    The Fed said last Wednesday it will pare its monthly
purchases of Treasuries and mortgage-backed securities in
January by $10 billion to $75 billion.
    Through a statement released following a two-day policy
meeting, the Fed aimed to mitigate its tapering of the bond
purchase program with a commitment to keep short-term rates near
zero if unemployment were to stay high and inflation were stuck
below its 2 percent target, analysts said.
    "The market is still adjusting to the Fed making a
qualitative change rather than a quantitative change in their
policy thresholds which would have been easier for the market to
digest," said Vishal Khanduja, portfolio manager at Calvert
Investments in Bethesda, Maryland.
    The futures market, however, continued to signal traders'
anxiety about the Fed possibly raising policy rates earlier than
what it suggested last week.
    Federal funds futures implied traders are pricing in a 56
percent chance of a rate rise in June 2015, up from 54 percent
on Monday and 39 percent a month ago, according to CME Group's
FedWatch, which computes traders' expectations of the fed funds
rate that the Fed influences through monetary policy.
    The rise in bond yields has raised home finance costs,
reducing mortgage activity in the latest week.
    The Mortgage Bankers Association said on Tuesday its index
on weekly application activity fell 6.3 percent to the lowest
level in 13 years as the average interest rate on 30-year
mortgages edged up to its highest level in three months. 
  
    The housing recovery was disrupted by a jump in mortgage
rates this past summer, but it has shown signs of regaining
footing in recent months. New home sales slowed to an annualized
pace of 464,000 in November from an upwardly revised 474,000
pace in October, which was the strongest since July 2008.
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