REFILE-TREASURIES-U.S. bond prices rise as Fed hints no hurry to hike rates

Wed Jul 9, 2014 4:09pm EDT

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By Richard Leong

NEW YORK, July 9 (Reuters) - U.S. Treasuries prices rose on Wednesday as the Federal Reserve acknowledged the recent strengthening in the U.S. economy in the minutes of its June meeting but suggested it was unlikely to raise policy rates until the second half of 2015.

The bond market eked out a third day of price gains in choppy trading even after a poor $21 billion 10-year note auction. This week's $61 billion in fixed-rate note supply will conclude with a $13 billion auction of 30-year bonds.

"We need the Fed to change its tune on its monetary policy outlook in order for interest rates to go up," said Michael Materasso, co-chairman of the fixed income policy committee at Franklin Templeton in New York.

In its June 17-18 meeting minutes, the Federal Open Market Committee, the Fed's policy-setting group, further discussed the use of interest on excess reserves and fixed-rate reverse repurchase agreements to help achieve its target interest rate when it decides to tighten policy.

In the meantime, policymakers signaled they wanted to stop purchases of Treasuries and mortgage-backed securities in October. They started to pare the Fed's third round of quantitative easing in January.

Demand for Treasuries has been underpinned by worries about corporate earnings, weak overseas economic data, as well as the intensified fighting between militants in Gaza and the Israeli military.

Expectations that the European Central Bank might engage in more stimulus to help its struggling economy have also fed demand for Treasuries that are yielding more than German Bunds.

"What the ECB is doing is having a big effect" on Treasuries, said Eric Stein, co-director of global income group at Eaton Vance Management in Boston.

Benchmark 10-year Treasuries finished 3/32 higher in price at a yield of 2.5539 percent, down 1 basis point from Tuesday. The 10-year yield traded in a 6 basis point range.

The 30-year bond ended up 7/32 in price for a 3.369 percent yield, down 1 basis point. The 30-year yield bounced between 3.358 to 3.397 percent.

Among shorter maturities, the yield on three-year notes climbed above 1 percent for the first time since May 2011 before falling below that threshold at 0.9783 percent in late trading.

Before the FOMC minutes, the Treasury Department held the second reopening of the 10-year issue introduced in May. It was sold at a 2.597 percent yield, the lowest since June 2013.

Overall results of the 10-year sale suggested below-average demand for the maturity with direct bidders buying their smallest share since January. (Editing by Jeffrey Benkoe and Nick Zieminski)

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