TREASURIES-U.S. bond prices gain as services data disappoints

Mon Jan 6, 2014 3:47pm EST

Related Topics

* Fed restarts QE3, buys $1.39 billion in long-dated bonds
    * U.S. ISM services index unexpectedly falls, factory orders
rise
    * Bond gains curbed by coming government, corporate supply
    * U.S. Senate seen confirming Yellen as Fed chair


    By Richard Leong
    NEW YORK, Jan 6 (Reuters) - U.S. Treasuries prices rose on
Monday after weaker-than-expected data on the U.S. services
sector raised hopes the Federal Reserve would slow its reduction
of bond purchases, spurring bids for government debt. 
    The early 2014 losses on Wall Street after its stellar run
last year rekindled some safe-haven appetite for U.S. government
debt, analysts and traders said. 
    Medium and long-dated U.S. yields have retreated from their
2-1/2 year highs set last week with the 10-year yield falling
below the key 3 percent threshold. 
    But yields could resume their rise on further proof that the
domestic labor market is creating jobs at a monthly clip of
about 200,000, analysts said. If employers were to hire workers
at that pace in December, it would support the view that the Fed
will keep dialing back its third round of quantitative easing
this year.
    "We had a run of stronger-than-expected data in December
that pushed the 10-year yield above 3 percent. We are now seeing
some weaker data so we are seeing it falling below 3 percent,"
said Stan Shipley, bond strategist at ISI Group in New York.
    On Dec. 18, Fed policymakers said the central bank would buy
$75 billion in Treasuries and mortgage-backed securities per
month starting in January - a reduction of $10 billion in its
monthly purchases - on evidence of an improving economy. 
    Last Friday, Fed Chairman Ben Bernanke gave an upbeat
outlook on the economy at an event in Philadelphia, but he
cautioned that the recovery "clearly remains incomplete."
 
    Monday's data supported Bernanke's view of the uneven
recovery. 
    The Institute for Supply Management said its index on
services fell in December, while the Commerce Department said
new orders for factory goods rebounded in November following a
drop in October.  
    "The number that matters is Friday's payrolls number,"
Shipley said.
    Economists polled by Reuters estimated U.S. employers added
195,000 jobs last month, compared with 203,000 in November,
while they forecast that the jobless rate held at a five-year
low of 7.0 percent.
    The benchmark 10-year U.S. Treasury note rose
8/32 in price to yield 2.963 percent, down 3 basis points from
late on Friday. The 30-year bond, after climbing
nearly 1 point in price, ended up 19/32 to yield 3.894 percent,
down 3.5 basis points from Friday. 
    The 10-year note's yield hit a near 2-1/2-year high of 3.041
percent last Thursday, while the 30-year bond's yield touched
4.001 percent a week ago, which was its highest intraday level
since early August 2011, according to Reuters data.
    
 
    The U.S. central bank restarted its QE3 program on Monday
after a hiatus during the Christmas and New Year holidays. It
bought $1.391 billion of Treasuries due from May 2036 to August
2043. 
    In other Fed developments, the U.S. Senate is expected to
confirm Janet Yellen to succeed Bernanke as chair of the central
bank in a vote scheduled late Monday afternoon. If confirmed,
Yellen will be the first woman to serve as the Fed's top
official. 
    For Wall Street, Yellen's tenure as Fed chief would likely
support the notion that the Fed will stick with an aggressive
stimulus, which has kept interest rates low and stoked the
recovery in the housing and stock markets that were hammered
during the Great Recession. 
    The Fed's resumption of its bond buys came as the Treasury
Department prepared to sell $30 billion in three-year debt on
Tuesday, $21 billion in 10-year notes on
Wednesday and $13 billion in 30-year bonds on
Thursday.
    In "when-issued" activity, traders expected the upcoming
three-year issue to sell at a yield of 0.8070 percent, which
would be the highest yield at a three-year auction since
September. 
    Traders anticipated solid demand for the three-year notes
given the relatively wide yield gap between two-year and
three-year Treasuries, but they were less certain about the
bidding for longer maturities before Friday's payroll data.
    "People are comfortable with the three-year part of the
curve because they think it's the sweet spot with the rolldown
and some people think the Fed won't raise rates until 2016,"
said Thomas Roth, executive director of U.S. government bond
trading at Mitsubishi UFJ Securities USA in New York. 
    Competing for investors' cash will be an expected heavy wave
of investment-grade corporate bonds, which analysts say should
rebound following a poor 2013.
    Bond dealers forecast that companies plan to sell $90
billion to $100 billion in high-grade debt in January, according
to IFR, a unit of Thomson Reuters.
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