CORRECTED-TREASURIES-U.S. bond prices dip on jitters over Fed tapering

Tue Jan 21, 2014 11:11am EST

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(Corrects Cullinane's firm to D.A. Davidson, paragraphs 2 and 14)

* U.S. Fed on track to taper bond purchases next week-WSJ

* Some traders cite lower prices partly on mortgage hedging

* Fed to buy $1.0-$1.5 bln long-dated Treasuries

By Richard Leong

NEW YORK, Jan 21 (Reuters) - U.S. Treasuries prices slipped on Tuesday with benchmark yields edging up from five-week lows on concerns about the Federal Reserve further paring its bond-purchase monetary stimulus at its policy meeting next week.

Some traders attributed those worries stemming from an article in The Wall Street Journal that said the U.S. central bank will likely reduce its monthly purchases of Treasuries and mortgage-backed securities by $10 billion to $65 billion.

"The view out there is there's going to be continued tapering on a gradual basis. Another $10 billion in tapering is a logical way to go," said Mike Cullinane, head of Treasuries trading with D.A. Davidson in St. Petersburg, Florida.

Such a move followed the somewhat surprising decision from the Fed to begin shrinking its third round of quantitative easing (QE3) at its December policy meeting by reducing its bond purchases in January by $10 billion from $85 billion.

Fed officials will hold their next monetary policy meeting on Jan. 28-29.

"The Federal Reserve is on track to trim its bond-buying program for the second time in six weeks as a lackluster December jobs report failed to diminish the central bank's expectations for solid U.S. economic growth this year," The Wall Street Journal story published late Monday said, citing interviews with officials and their public comments.

Some analysts downplayed the article in The Wall Street Journal as a key factor exerting downward pressure on Treasuries prices. They reckoned the modest decline on light volume and hedging tied to mortgage holdings after a U.S. holiday weekend.

U.S. financial markets were closed on Monday in observance of the Martin Luther King Jr. holiday.

As traders speculate on possible further tapering, the Fed plans to buy, later on Tuesday, $1.00 billion to $1.50 billion in Treasuries due in 2036 to 2043, which is its latest QE3 purchase.

The 30-year bond managed to climb higher due to traders positioning for the Fed's latest buyback operation at 11 a.m. (1600 GMT). It last traded up 5/32 with a yield of 3.747 percent, down 1 basis point from Friday's close.

Benchmark 10-year Treasuries notes last traded 2/32 lower in price with a yield of 2.834 percent, up about 1 basis point from late on Friday.

The 10-year yield was as high as 2.867 percent overnight after hitting 2.818 percent last Friday, which was its lowest level since Dec. 11, according to Reuters data.

Traders and analysts anticipated the 10-year yield to hold in a range between 2.75 percent to 3.00 percent heading into the Fed policy meeting next week.

"I don't see a lot to shake us out of this range," D.A. Davidson's Cullinane said. (Reporting by Rich Leong)

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Comments (2)
PeterCatranis wrote:
Questions every Treasury investor should ask themselves as QE winds down.

1) What is the currency and instrument risk of owning a U.S. Treasury relative to the reward with interest rates near historic lows?

2) What is the only direction short term rates can have a major market move?

3) Who will replace the Fed once they’re tapered out?

4) What’s going to happen when global recovery finally engages and fight to quality trades unwind? Who’s going to be on the other side of these trades?

Personally I believe the U.S. Treasury market in hanging by a 6 trillion dollar thread controlled by foreign investors who have their finger on the sell trigger. The currency risk holding USD for these foreign investors is more in one day than their annual yields, on durations up to 5 years, if foreign selling ignites do you really believe the Fed can stop a 6 trillion dollar freight train? To put this into proper perspective the Quantitative Easing life support totaled around 4 trillion.

If the Fed does step up to the plate and creates the trillions of dollars required to stop the hemorrhage in the Treasury market do you honestly believe the US dollar will maintain its value and inflation will remain contained?

Finally one day I hope the Fed can explain to everyone how stripping savers of trillions of dollars in interest income and forever removing it from the free market economy to save the US Treasury the same in debt service costs stimulated the economy? Adding insult to injury the Fed funds rate hit an all time record low below 0.10% while the prime lending rate remained unchanged at 3.25% since 2009.

Guess we just had it wrong it wasn’t economic stimulus for the taxpayer or saver it was economic stimulus for the banks and US Treasury with the taxpayer/saver once again picking up the tab.

Good Trading,
Peter Catranis

Jan 21, 2014 6:21pm EST  --  Report as abuse
PeterCatranis wrote:
Questions every Treasury investor should ask themselves as QE winds down.

1) What is the currency and instrument risk of owning a U.S. Treasury relative to the reward with interest rates near historic lows?

2) What is the only direction short term rates can have a major market move?

3) Who will replace the Fed once they’re tapered out?

4) What’s going to happen when global recovery finally engages and fight to quality trades unwind? Who’s going to be on the other side of these trades?

Personally I believe the U.S. Treasury market in hanging by a 6 trillion dollar thread controlled by foreign investors who have their finger on the sell trigger. The currency risk holding USD for these foreign investors is more in one day than their annual yields, on durations up to 5 years, if foreign selling ignites do you really believe the Fed can stop a 6 trillion dollar freight train? To put this into proper perspective the Quantitative Easing life support totaled around 4 trillion.

If the Fed does step up to the plate and creates the trillions of dollars required to stop the hemorrhage in the Treasury market do you honestly believe the US dollar will maintain its value and inflation will remain contained?

Finally one day I hope the Fed can explain to everyone how stripping savers of trillions of dollars in interest income and forever removing it from the free market economy to save the US Treasury the same in debt service costs stimulated the economy? Adding insult to injury the Fed funds rate hit an all time record low below 0.10% while the prime lending rate remained unchanged at 3.25% since 2009.

Guess we just had it wrong it wasn’t economic stimulus for the taxpayer or saver it was economic stimulus for the banks and US Treasury with the taxpayer/saver once again picking up the tab.

Good Trading,
Peter Catranis

Jan 21, 2014 6:21pm EST  --  Report as abuse
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