TREASURIES-Yields fall to two-week low on dovish Fed

Thu Jun 19, 2014 11:20am EDT

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(Adds quote, details, updates prices)
    * Yields fall as Fed seen staying accommodative
    * Curve steepens as investors readjust positions
    * Treasury to sell $7 bln 30-year TIPS
    * Fed buys $2.51 bln notes due 2022-2024

    By Karen Brettell
    NEW YORK, June 19 (Reuters) - U.S. Treasuries yields fell to
two-week lows on Thursday, a day after the Federal Reserve
struck a more dovish tone than expected at its June meeting,
reassuring investors that the U.S. central bank will remain
accommodative for some time.
    The Federal Reserve on Wednesday expressed confidence the
U.S. economic recovery was on track and hinted at a slightly
more aggressive pace of interest rate increases starting next
year, but added that a recent uptick in inflation was not a
concern. 
    Stronger-than-expected consumer price data on Tuesday had
led some investors to expect the Fed would hint towards interest
rate hikes sooner than had been previously expected. 
    "There was some hope that they would be more hawkish, but
they are ignoring the uptick in inflation," said Charles
Comiskey, head of Treasuries trading at Bank of Nova Scotia in
New York. Now "people are adjusting their positions."
    The inflation increase may, however, help the Treasury sell
$7 billion in new 30-year Treasury Inflation-Protected
Securities (TIPS) later on Thursday.
    Benchmark 10-year notes rose 1/32 in price to
yield 2.59 percent, down from 2.62 percent late on Wednesday.
Five-year notes gained 1/32 in price to yield 1.67
percent, down from 1.72 percent.
    The longer-dated yield curve also continued to steepen as
investors unwound bets on further flattening and added positions
for more steepening. The curve between 5-year notes and 30-year
bonds steepened to 175 basis points, up from
five-year lows of 165 basis points on Monday.
    Two-year note yields fell to 0.44 percent, from
0.48 percent on Wednesday.  
    "When Janet Yellen restated that short-term rates will stay
lower well after tapering ends it was somewhat reassuring," said
Jim Kochan, chief fixed income strategist at Wells Fargo Funds
Management in Menomonee Falls, Wisconsin.
    Many investors have anticipated rates will rise as the
economy gains momentum but the selloff hasn't yet happened, with
10-year yields stuck in a relatively small range between around
2.40 percent and 2.80 percent since late January.
    "Yields are sustainable only if investors are convinced that
short-term rates aren't going up anytime soon," said Kochan.
    The Fed bought $2.51 billion in notes due from 2022 to 2024
on Thursday.
    The Treasury said it will sell $94 billion in new two-year,
five-year and seven-year notes next week.

 (Editing by Andrea Ricci and Meredith Mazzilli)
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