TREASURIES-Prices drop after Fed minutes show support for taper

Wed Feb 19, 2014 3:31pm EST

Related Topics

* Fed minutes show support for continuing taper
    * Fed buys $1.25 bln bonds due 2036-2044
    * Fed to purchase $2.25 bln-$2.75 bln notes due 2021-2024
Thursday
    * Housing starts fall, producer prices rise

    By Marina Lopes and Karen Brettell
    NEW YORK, Feb 19 (Reuters) - U.S. Treasury prices fell on
Wednesday as minutes of the Federal Reserve's January meeting
showed members supported continued tapering of the central
bank's bond-buying program in the absence of a significant
change in the economy.
    The minutes showed members on the Fed's policy setting
committee wanted to affirm that its asset-purchase program would
be trimmed in predictable $10-billion steps. 
    The Fed is seen likely to continue paring its monthly
purchases as Fed members view much of the recent economic
weakness as a temporary phenomenon that is due to unseasonably
cold weather.
    "It suggests that they see the recent weakness in economic
activity as fairly transitory. They don't think this is a
permanent trend. Even if we see lower growth in 2014 they will
still continue to taper," said Gennadiy Goldberg, an interest
rate strategist at TD Securities.
    "It puts a bit of upward pressure on interest rates. If
there was anyone thinking the Fed would show debate about
slowing purchases, it is not there," Goldberg said.
    Benchmark 10-year notes fell 6/32 in price to
yield 2.74 percent after the FOMC minutes, erasing earlier price
gains, up from 2.71 percent late on Tuesday. Thirty-year bonds
 gained 16/32 in price to yield 3.71 percent, up from
3.68 percent.
    The Fed said in December that it had decided to taper its
bond purchases by $10 billion a month and followed that up last
month by announcing another $10 billion reduction.
    The U.S. central bank bought $1.25 billion in bonds due
between February 2036 to August 2043 on Wednesday as part of its
ongoing bond purchase program. It will purchase between $2.25
billion and $2.75 billion in notes due 2021 to 2024 on Thursday.
    Yields on 10-year Treasuries have traded in a range of
around 2.65 percent to 2.80 percent for the past two weeks, and
new signals on the direction of the economy in the wake of the
recent weak data are likely needed to break out of the range.  
    "It has to be some kind of confirmation that the economic
slowdown is for real rather than just weather-related. We need a
real confirmation of a different change in Fed policy or a
different economic landscape where people are confident about
the results that are coming out for the market to move
dramatically," said Tom Tucci, head of Treasuries trading at
CIBC in New York.
    U.S. housing starts recorded their biggest drop in almost
three years on Wednesday, likely weighed down by harsh weather,
but the third month of declines in permits pointed to some
underlying weakness in the housing market. Permits to build
homes fell 5.4 percent in January, the largest drop since June.
 
    Investors said that a recent spate of weaker data in the
housing and labor markets made the Fed minutes somewhat dated.
They are now looking to data on inflation, jobless claims and
manufacturing due on Thursday for a firmer indication of the
U.S. economic outlook and the Fed's forward guidance. 
    U.S. producer prices also rose for a second straight month
in January, pushed up by an increase in the cost of goods, but
there was little sign of a broad pick-up in inflation pressures
at the factory gate.
    Tepid inflation may complicate the Federal Reserve's
strategy in the intermediate term as it pares its bond purchases
and moves closer to raising interest rates from record low
levels, analysts said.
    The Labor Department said on Wednesday its seasonally
adjusted producer price index for final demand increased 0.2
percent last month, the largest increase since October. It was
the first release since the expansion of the index to include
services and construction.
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