TREASURIES-Yields rise as stocks gain, Yellen optimistic on economy

Wed Apr 16, 2014 3:07pm EDT

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(Recasts, adds quotes, details, updates prices)
    * Prices fall as China growth beats expectations, stocks
rise
    * Industrial production strong, housing data disappoints
    * Yellen optimistic on economy; stresses jobs, inflation
    * Five, seven-year notes underperform after Yellen
    * Treasury to sell $18 bln, 5-yr TIPS on Thursday

    By Karen Brettell
    NEW YORK, April 16 (Reuters) - U.S. Treasuries prices fell
on Wednesday as rising stocks reduced demand for lower risk
government bonds, and as Federal Reserve Chair Janet Yellen
expressed optimism on the economy.
    Better-then-expected growth in China, the world's largest
economy, and a rally in Yahoo shares helped stocks rise for a
third straight session. 
    U.S. economic reports showed signs of overall strength. The
data came as Yellen stressed that employment and inflation will
be key to the still distant decision over when to raise interest
rates. 
    "The main message continues to be that the Fed remains
committed to providing a helping hand to the economic recovery,
while becoming more confident in the ability of the recovery to
finally achieve liftoff later this year," said Millan Mulraine,
deputy chief economist at TD Securities in New York.
    More Wall Street economists believe the U.S. central bank
will raise interest rates in the first half of 2015, as evidence
builds that the U.S. economy has regained some momentum lost
during an unusually rough winter, a Reuters survey showed
earlier this month. 
    Five-year notes and seven-year notes,
which are the most sensitive to interest rate policy, were the
worst performers after Yellen's comments. 
    Five-year notes were last down 4/32 in price to yield 1.65
percent, up from 1.62 percent late on Tuesday. Seven-year notes
fell 5/32 in price to yield 2.21 percent, up from 2.18 percent.
    Benchmark 10-year notes dropped 2/32 in price to
yield 2.64 percent, down from 2.67 percent earlier on Wednesday.
The yields fell to one-and-a-half month lows of 2.60 percent on
Tuesday, as concerns about escalating tension in Ukraine sparked
safety buying and a weak New York manufacturing survey raised
fears over the strength of the U.S. recovery.
    Data on Wednesday was mixed, but was overall seen as more
bullish than bearish for the economy.
    U.S. industrial production rose at a faster-than-expected
clip in March, and groundbreaking for new homes increased, but
remained well below the post-recession peak hit in November,
signaling the drag the housing market is placing on the
economy. 
    "Industrial production and capacity utilization were both
stronger than expected, probably trumping the housing starts
number, which was a little bit weaker," said Lou Brien, a market
strategist at DRW Trading in Chicago.
    The Fed also said that U.S. economic activity picked up in
recent weeks as weather-related drag lifted in its Beige Book
report of anecdotal information on business activity collected
from contacts nationwide. 
    Data on Thursday, including a Philadelphia manufacturing
survey, will be watched for further signals on the state of the
economy.
    Demand for inflation-linked debt will also be tested on
Thursday when  the Treasury sells $18 billion in five-year
Treasury inflation-protected securities, or TIPS.
    TIPS have been among the worst performing assets since the
Fed last year indicated it would begin paring its bond purchase
program, leading many to wonder what will spark inflation, which
continues to run below Fed targets of 2 percent.
    Yellen on Wednesday emphasized that she still views low
inflation as due to temporary influences and believes that it is
likely to gradually rise back to the 2 percent level.
    Dallas Fed President Richard Fisher said on Wednesday that
he is "not uncomfortable" with the current low level of U.S.
inflation, and will not vote for or support any policy that
drives it above the Fed's long-term 2-percent goal.
 
    Atlanta Fed President Dennis Lockhart also spoke on
Wednesday, saying the Fed should try to make its communications
on the expected path of interest rates more consistent with its
policy statements. 
    The Fed bought $1.02 billion in bonds due from 2036 to 2044
on Wednesday as part of its ongoing purchase program.
    The bond market will close early on Thursday and be closed
all day on Friday for the Good Friday holiday.

 (Editing by Meredith Mazzilli, Jonathan Oatis and Chris Reese)
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