* Fed statement, Bernanke offer no policy surprises
* 30-year bond tumbles after Fed raises inflation view
* Average results at $35 billion five-year debt auction
* Advance 1st-quarter GDP, 7-year note auction on tap
(Adds graphic links)
By Richard Leong
NEW YORK, April 27 U.S. Treasuries fell on
Wednesday as profit-taking and selling to make room for
upcoming seven-year supply overshadowed the Federal Reserve's
pledge to hold short-term interest rates near zero.
The Fed's increase to its inflation forecasts also hurt the
market, hammering the 30-year bond price down by more than 1
Fed Chairman Ben Bernanke's first-ever news conference
after a policy meeting produced no surprises as he spoke about
the economy and monetary policy. He signaled another round of
quantitative easing is unlikely with the current $600 billion
bond purchase program, known as QE2, on track to end in June.
Long-dated Treasuries trailed short-dated issues on worries
that the Fed's adherence to ultra-loose policy to promote jobs
and economic growth could leave inflation unchecked.
"With the front end effectively anchored with the continued
inclusion of extended period language, it seems the potential
for an inflation wild card, most likely in the form of
commodity prices and oil, could be the dominant curve trade
over the near term," said Christian Cooper, head of U.S. dollar
rates trading at Jefferies & Co in New York.
Fed balance sheet: link.reuters.com/buf92k
QE may flatten yield curve, stocks:r.reuters.com/qyw78r
QE2/S&P 500/10-year TIPS yield: r.reuters.com/faq98r
Treasury issue/Fed bond purchase: r.reuters.com/pys29r
Wednesday's sell-off snapped the market's three-session
winning streak that pushed yields to one-month lows by Tuesday.
Traders reduced curve bets on long-dated bonds that were based
on expectations that inflation will remain tame despite rising
oil and commodity prices.
On Wednesday, Fed policymakers acknowledged inflation
pressure from rising commodity prices but played down its
impact as "transitory." They maintained inflation expectations
have remained "stable."
Just before Bernanke started his conference, the U.S.
central bank released its latest economic forecasts. It now
sees core inflation running at 1.3 to 1.6 percent in 2011,
higher than the previous range of 1.0 to 1.3 percent.
The 30-year bond US30YT=RR, which is most vulnerable to
the market's inflation outlook, fell 1-3/32 to yield 4.46
percent, up from 4.39 percent late on Tuesday.
Benchmark 10-year notes US10YT=RR shed 12/32 for a yield
of 3.35 percent, up 3.31 percent on Tuesday.
Other market inflation measures ended flat to higher on the
Fed's latest inflation forecasts after falling on the perceived
dovish slant in the Fed's policy statement.
The 10-year breakeven rate, or the yield spread between
10-year Treasury Inflation-Protected Securities and regular
U.S. government debt, was steady at 2.60 percentage points.
Earlier, investors making room for $35 billion of five-year
notes, and a stronger-than-expected report on durable goods
orders exerted initial downward pressure on bond prices.
Prices bounced up from session lows after the latest
five-year note auction, part of this week's $99 billion in
coupon supply, was not as weak as some had feared.
On Thursday, the Treasury will sell $29 billion worth of
seven-year notes, whose yield was 2.75 percent in when-issued
Investors will also receive the government's first reading
on gross domestic product and inflation in the first quarter.
Economists polled by Reuters predict GDP likely slowed to
an annualized growth rate of 2.0 percent from 3.1 percent in
the fourth quarter.
The core rate on personal consumption expenditure, the
Fed's preferred inflation gauge, likely accelerated by a 1.4
percent pace in the first quarter, compared with 0.4 percent in
the prior quarter.
(Additional reporting by Ellen Freilich; Editing by James