TREASURIES-Bonds gain on safe-haven bids ahead of Fed decision

Wed Jan 29, 2014 12:03pm EST

Related Topics

* Fed expected to announce decision at 2 p.m. ET (1900 GMT)

* Turkey central bank rate hike impact faded

* Prices supported by expectations for low short-term rates

By Sam Forgione

NEW YORK, Jan 29 (Reuters) - U.S. Treasuries prices rose on Wednesday on expectations that a further pullback in the U.S. Federal Reserve's bond-buying would cause more pain for emerging market assets, leading investors to favor safe-haven bonds.

The impact of Turkey's interest rate hike during a midnight policy meeting to defend its battered lira currency quickly faded as traders sold riskier emerging market assets and bought Treasuries ahead of the Fed's decision, due at 2 p.m. ET.

"As they taper, they're taking away the punchbowl, and that affects risky assets," said Kathy Jones, fixed income strategist at Charles Schwab in New York. "People go to Treasuries when the world is in this sort of turmoil."

At its two-day policy meeting that began Tuesday, the Fed is considering whether to further scale back its bond-purchase program, which is aimed at holding down long-term borrowing costs to help the economy. The low interest rates have fueled demand for riskier, higher-yielding assets.

In December, the Fed reduced its monthly purchases of Treasuries and mortgage-backed securities by $10 billion to $75 billion. Some analysts expect the Fed will cut purchases by another $10 billion this week.

Treasury prices also rose despite incoming supply. The U.S. Treasury Department debuted $15 billion in two-year floating rate notes on Wednesday, and will sell $35 billion in five-year notes and $29 billion in seven-year debt on Thursday.

Benchmark 10-year Treasury notes were last up 9/32 in price to yield 2.715 percent, up in price from a yield of 2.748 percent late on Tuesday. Bond yields move inversely to their prices.

While the Fed is expected to further trim its monthly asset purchases, expectations that the Fed will keep short-term interest rates low also reinforced the gains in Treasuries.

"Since data has been weaker than expected, the Fed will remain dovish and keep the Fed funds rate low, which has supported Treasury prices today," said Tanweer Akram, senior economist at ING U.S. Investment Management in Atlanta.

The Commerce Department reported on Tuesday that orders for long-lasting U.S. manufactured goods fell by 4.3 percent in December.

The Fed has kept the Federal funds rate, its benchmark short-term borrowing rate, at 0 to 0.25 percent since late 2008 to help the economy recover from recession, and it has promised to keep it there for a while longer, probably until 2015.

On Wall Street, the three major stock indexes dipped, with the benchmark Standard & Poor's 500 stock index falling 0.38 percent.

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