TREASURIES-Prices gain as Fed more dovish than expected

Wed Jun 18, 2014 3:06pm EDT

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(Recasts, adds quotes, updates prices)
    * Prices gain as Fed more dovish than expected
    * Short covering seen fueling rally, 2-year notes 'special'
    * Yield curve steepens, intermediate debt outperforms
    * Fed to buy $2.25 bln-$2.75 bln notes 2021-2024 Thursday

    By Karen Brettell
    NEW YORK, June 18 (Reuters) - U.S. Treasuries prices gained
on Wednesday, after the Federal Reserve took a more dovish
stance on monetary policy than some had expected at its June
meeting, a day after data showed that inflation pressures are
rising.
    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.
    But the U.S. central bank didn't play up the inflation
increase and kept its statement little changed from its previous
meeting, helping bond prices gain.
    "There were a lot of people that thought there would be a
lot more mention of inflation there, that there would have been
a more hawkish tone, but on balance it came out fairly dovish,"
said Aaron Kohli, an interest rate strategist at BNP Paribas in
New York.
    Bonds gained before the statement, and the yield curve
steepened, with traders attributing much of the price move to
investors covering bearish bets that bonds are likely to weaken.
    Two-year notes traded "special" on Wednesday, or at negative
interest rates, in the repurchase agreement market (repo),
indicating a number of investors were short the notes. 
    "We're seeing a little bit of short covering," said Jason
Rogan, a managing director in Treasuries trading at Guggenheim
Securities in New York.
    Treasuries erased price gains immediately after the
statement was released in choppy trading, before resuming their
rally.
    "The statement itself was utterly predictable," said Brian
Jacobsen, chief portfolio strategist, investments group at Wells
Fargo Funds Management in Menomonee Falls in Wisconsin. "More
interesting was the timing as far as when they will start
raising rates. There was an ever so slight shift to being more
dovish."
    Benchmark 10-year notes gained 12/32 in price to
yield 2.61 percent, just lower than before the statement.
Five-year notes rose 7/32 in price to yield 1.71
percent, little changed from before the statement.
    The yield curve between 5-year notes and 30-year bonds
 steepened back to 171 basis points, where it had
traded before the statement.
    The Fed hinted at a slightly faster pace of interest rates
increases starting next year, but suggested rates in the
long-run would be lower than it had indicated previously.
    The central bank slashed its forecast for U.S. economic
growth to a range of between 2.1 percent and 2.3 percent from an
earlier forecast of around 2.9 percent, but expressed confidence
the recovery was largely on track.
    It also reduced its monthly asset purchases from $45 billion
to $35 billion a month, divided between $20 billion of Treasury
securities and $15 billion of mortgage-backed debt, as widely
expected. 
    The Fed will buy between $2.25 billion and $2.75 billion in
notes due from 2021 to 2024 on Thursday.
    

 (Additional reporting by Rodrigo Campos; Editing by Nick
Zieminski)
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