TREASURIES-Prices gain as investors cover bearish bets before Fed

Wed Jun 18, 2014 11:08am EDT

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(Recasts, adds quotes, updates prices)
    * Prices gain before Fed statement
    * Short covering seen fueling rally, 2-year notes 'special'
    * BoE less hawkish than expected, adds to bond bid
    * Yield curve steepens, intermediate debt outperforms

    By Karen Brettell
    NEW YORK, June 18 (Reuters) - U.S. Treasuries prices rose on
Wednesday as investors hedged some bets that bonds are likely to
weaken, with expectations high that the Federal Reserve may
strike a hawkish tone when it releases a statement from its
policy meeting this afternoon.
    Prices had tumbled on Tuesday after a higher-than-expected
consumer price inflation indicator led investors to prepare for
the possibility that the Fed will be open to raising rates
sooner than some had thought.
    Investors have been more wary of central banks becoming more
hawkish since Bank of England Governor Mark Carney surprised
markets last Thursday by saying Britain could become the first
major economy to tighten monetary policy since the 2008
financial crisis. 
    Two-year notes traded "special" on Wednesday, or at negative
interest rates, in the repurchase agreement market (repo),
indicating a number of investors are holding bearish bets on the
bonds.
    "We're seeing a little bit of short covering," said Jason
Rogan, a managing director in Treasuries trading at Guggenheim
Securities in New York. "It seems more like a short-covering
rally rather than a change in expectations for today's Fed."
    Benchmark 10-year notes rose 6/32 in price to
yield 2.63 percent, down from 2.65 percent late on Monday.
Intermediate-dated debt also outperformed, with five-year notes
gaining 5/32 in price to yield 1.72 percent, down from 1.75
percent.
    The Treasuries yield curve steepened on Wednesday, which
added a bid for bonds to cover short positions.
    "Most people are in flattening trades, when it steepens back
there is a short bid," said Tom Tucci, head of Treasuries
trading at CIBC in New York.
    The timetable for when each member of the Federal Open
Market Committee expects policy to begin tightening will be
among the most keenly scrutinized factors on Wednesday, as will
any comments about interest rate hikes or slack in the economy
from Fed Chair Janet Yellen, who is due to speak after the
statement from the meeting is released.
    The Fed is also seen as likely to reduce its U.S. economic
growth estimates for this year, though it may leave expectations
for 2015, when most expect the U.S. central bank to begin
raising rates, unchanged.
    The Fed is also widely expected to cut its bond purchases by
another $10 billion. 
    Bonds were also lifted on Wednesday after Bank of England
policymakers highlighted the need to increase rates gradually,
boosting U.K. and U.S. government debt and helping stocks.
    "The minutes were less hawkish than what Carney said last
week," said Tucci.
    Bank of England policymakers also said they were surprised
earlier this month that markets had not priced in a higher
chance of an interest rate rise this year, minutes of their June
4-5 policy meeting showed on Wednesday. 

 (Editing by W Simon and Nick Zieminski)
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