TREASURIES-Yields rise as Fed seen more tolerant of inflation

Fri Jun 20, 2014 2:38pm EDT

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(Updates prices, adds details on yield curve)
    * Most yields inch higher, inflation in focus
    * Economic data in focus next week
    * U.S. to sell $94 billion 2-, 5-, 7-year notes
    * Some short positions pared, hurting yields

    By Karen Brettell
    NEW YORK, June 20 (Reuters) - Most U.S. Treasuries edged
higher on Friday, though long bond prices rallied, as investors
focused on inflation concerns, two days after the Federal
Reserve played down a recent uptick in consumer price pressures.
    The Fed took a more dovish tone than many expected at its
June meeting, leading to volatile changes in trading positions,
even though benchmark 10-year yields on Friday ended little
changed from before the meeting.
    The long-dated yield curve steepened to two-week highs early
on Friday as investors focused on the prospect of higher
inflation, before buying of 30-year bonds erased some of the
move. 
    "There's the thought I think that maybe (the Fed) will let
inflation run a little bit higher and not raise rates," said Dan
Mulholland, managing director in Treasuries trading at BNY
Mellon in New York.
    Data on Friday showed that higher energy costs pushed
Canada's annual inflation rate to a 27-month high of 2.3 percent
in May. 
    Treasuries yields have fallen this year despite a broad
expectation that they would rise, with short-covering by
investors that made bearish bets heading into the year seen as a
large driver of the rally.
    Some investors have been unwinding these losing positions,
however, which may be creating bond weakness.
    "We're getting the feeling that some of the shorts are being
pared back, which means that positioning is becoming more
balanced and that's consistent with the modest increase in
yields that we've seen in the last few days," said Boris
Rjavinski, an interest rate strategist at UBS in New York.
    "People that are stuck in these bad bearish trades are
coming to a realization that there will be no major relief in
sight in the following few weeks," Rjavinski said.
    Benchmark 10-year notes were last down 1/32 in
price to yield 2.63 percent, up from 2.62 percent late on
Thursday. The notes yielded 3 percent at the beginning of the
year.
    The curve between five-year notes and 30-year bonds
 flattened to 175 basis points, after earlier
rising to a two-week high of 179 basis points. It is up from a
five-year low of 165 basis points on Monday.
    Investors will be focused on a number of indicators due next
week, which cover housing, manufacturing, durable goods,
consumer confidence and gross domestic product.
    The Treasury is also due to sell $94 billion in new debt,
including $30 billion in two-year notes on Tuesday, $35 billion
in five-year notes on Wednesday and $29 billion in seven-year
notes on Thursday.
    

 (Editing by Nick Zieminski; and Peter Galloway)
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